KEY POINTS:
Market economists and the Reserve Bank expect the annual inflation rate to have edged up slightly to 2.1 per cent from 2 per cent in June, when it is reported tomorrow.
But that figure, they warn, is flattered by the inclusion of the December 2006 quarter, when the consumers price index fell 0.2 per cent, reflecting a steep drop in the price of petrol.
That will fall out of the annual calculation when December 2007 quarter inflation is reported in three months and the inflation rate is expected to jump to 3 per cent.
The Reserve Bank sees it staying round about there until late 2009.
The September quarter increase in the CPI is expected to be 0.8 per cent, down from 1 per cent in June.
The high exchange rate should deliver lower prices for some imported goods such as cars and clothing.
But even with a high dollar some tradeables prices will rise.
ASB chief economist Nick Tuffley said global oil prices had been trending up since the start of the year.
He is looking for a 0.2 per cent increase in transport costs in the September quarter.
Food prices are also influenced by international prices, and they have been rising, driven by higher incomes in Asia and the increased use of corn for biofuel production.
Westpac chief economist Brendan O'Donovan expects food prices to climb 1.5 per cent in the quarter and housing-related costs to rise almost as much as the annual increase in local body rates starts to come through and rents rise.
There would be more focus on non-tradeables inflation than on the headline figure, he said.
Non-tradeable items - the goods and services that face no foreign competition - make up just over half of the consumers price index.
"We expect non-tradeable prices to post a 1 per cent gain over the quarter, keeping annual non-tradeable inflation at a worrying 4.1 per cent. The Reserve Bank is forecasting the same," he said.
Firms' pricing intentions, as reported in the Institute of Economic Research's quarterly survey of business opinion last Tuesday, clearly pointed to higher inflation ahead, O'Donovan said.
"Add to that a strong economic outlook and already high inflation expectations and the inflation picture going forward is starting to look very scary."
ANZ National Bank chief economist Cameron Bagrie takes a more sanguine view. There was clear evidence that domestic demand was waning, he said.
"We expect this to eventually start to ease inflation pressure, though we acknowledge this could take a while."
ASB's Tuffley said the Reserve Bank would need to see sustained evidence of economic activity slowing and capacity constraints easing before its inflation concerns would be alleviated.
