Inflation stats bound to make Reserve Bank edgy

Inflation figures out tomorrow will give an indication of how uncomfortable the Reserve Bank should be about the inflation outlook.

The consensus among forecasters for the March quarter consumers price index increase is clustered around 0.6 per cent, which would push the annual rate to 2.3 per cent.

The bank's own forecast in its monetary policy statement last month was 0.3 per cent for the quarter and 2 per cent for the year, but since then petrol prices have continued to climb, ending the quarter 10 per cent above where they started it. More significantly, the bank's forecasts for inflation one to three years out - the period it can influence - were already in the top quartile of its target band of 1 to 3 per cent.

And that did not include the impact on fuel and power prices of the emissions trading scheme, scheduled to come into effect on July 1 (barring last-minute capitulation to business lobbying). The bank expects the ETS to add 0.4 percentage points to inflation by the middle of next year.

Nor does it include the impact of the increase in GST from 12.5 per cent to 15 per cent from October 1, expected to be announced in next month's Budget. Statistics New Zealand says such a GST would push the CPI 2 per cent higher.

With headline inflation consequently heading towards a 5 per cent spike the Reserve Bank has little headroom to accommodate inflation surprises, economists say.

Westpac is picking an inflation rate of 0.7 per cent for the March quarter.

"[But] our bullish forecast partly reflects inconsequential quarterly volatility rather than a generalised lift in inflation," Westpac economist Dominick Stephens said.

Food and petrol prices will have pushed the quarterly rate up, offset by the hard-to-forecast seasonal drop in international air fares.

But the underlying trend in inflation is probably at its lowest ebb right now, he said. And Westpac expects in June quarter inflation to drop back to 0.3 per cent, partly because of the impact of last year's appreciation of the kiwi dollar on prices of imported wares.

"If it weren't for for the ETS and possible changes in GST we would be forecasting inflation to build only slowly back towards its recent average of 3 per cent over a period of three years. However, the ETS and GST will muddy the waters considerably, pushing headline inflation closer to 5 per cent for a year or so."

Non-tradeable inflation was unusually low in the December quarter - just 0.1 per cent, down from 1 per cent in September .

ASB economist Christina Leung expects it to rebound, to 0.7 per cent, in the March quarter. "Although part of this includes some typical increases for a March quarter - primarily rents and education fees - we believe construction costs will be a key driver of non-tradeable inflation," she said.

"Business surveys in recent months have shown an increase in pricing intentions in the construction sector."

More generally the substantial cuts to investment spending businesses made last year would exacerbate capacity pressures in the economy and keep non-tradeables inflation persistently high over coming years, she said.

Stephens said tomorrow's CPI release would be critically important for interest rate markets. Traders were agonising over whether or not the Reserve Bank would start its tightening cycle in June.