The New Zealand dollar fell by one US cent after Stats NZ data showed inflation eked out just a small gain in the March quarter, upping the ante for an interest rate cut next month.

The CPI rose 0.1 per cent in the March quarter bringing the annual rate of inflation to 1.5 per cent, down from 1.9 per cent in December, Stats NZ said.

The Kiwi dropped as low as US66.72c from US67.77c immediately before the release.

Economists had predicted the CPI rose 0.3 per cent in the three months ended March 31, for an annual increase of 1.7 per cent, according to the median estimate from a poll of economists by Bloomberg.

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The Reserve Bank had tipped a 0.2 per cent lift and an annual rise of 1.6 per cent.

The central bank has a dual mandate to support maximum sustainable employment and keep annual CPI inflation between 1 per cent and 3 per cent over the medium term, with a focus on the mid-point of 2 per cent.

Inflation has remained stubbornly weak and the March quarter result marks the eighth consecutive quarter it has been below the mid-point.

The bank surprised markets last month when it switched to an overt easing bias and said the most likely direction of the next move in the official cash rate is down from an already record-low 1.75 per cent.

Today's data may add to the view that the central bank could cut the OCR as early as May.

Inflation was low in the March quarter largely because of cheaper petrol and international airfares.

The price of petrol fell 7 per cent from the December quarter. Stats NZ noted, however, that while prices were lower in January and February, by the last week of March the petrol pump price was 3.7 per cent higher than the March quarter average.

Since then, prices have continued to rise.

March-quarter petrol prices were up 0.7 per cent from a year earlier.

Seasonal falls for international airfares also weighed on inflation.

Prices were down 11.8 per cent versus the December quarter. On the year they were down 1 per cent.

The lift in the CPI for the March quarter was due to higher prices for cigarettes, Stats NZ said.

An annual tobacco tax increase on Jan. 1 lifted cigarette and tobacco prices 9 per cent in the quarter. On the year, they were up 7.7 per cent.

"One cigarette now costs about $1.50 compared with $1.15 at the start of 2016. Ten years ago, cigarettes cost about 54 cents each."

Fruit and vegetable prices were also up 5.4 per cent on the quarter while alcoholic beverages lifted 2 per cent. On the year, however, fruit and vegetable prices were down 2.4 per cent while alcoholic beverages were up 2 per cent.

Food prices overall were up 1.2 per cent on the quarter and 1.3 per cent on the year.

Within the housing sector, housing and household utilities prices lifted 0.6 per cent on the quarter and 3 per cent on the year.

The lift in the housing and household utilities was the main driver behind the 1.5 per cent annual inflation rate, Stats NZ said.

Actual rentals for housing rose 0.6 per cent in the quarter and were 2.4 per cent higher for the year.

Household energy prices, which include electricity, gas and solid fuels, rose 1.2 per cent on the quarter and 2.7 per cent on the year.

Prices for the purchase of newly-built homes lifted 0.7 per cent on the quarter and were up 3.9 per cent on the year.

The tradables CPI, which includes goods and services that compete with international rivals, fell 1.3 per cent in the quarter.

It was down 0.4 per cent on the year, with lower prices for telecommunication equipment, audio-visual equipment and the purchase of used cars the main factors. Higher prices for overseas accommodation and meat and poultry offset the decrease.

Non-tradables inflation, which focuses on domestic goods and services, rose a quarterly 1.1 per cent for a 2.8 per cent annual increase.

Higher prices for cigarettes and tobacco were a key driver in both the quarterly and annual increase.

Stats NZ also noted the trimmed-mean measures, which exclude extreme price movements by progressively removing the influence of the largest increases and decreases, ranged from 1.7 per cent to 1.9 per cent for the year.

That "indicates that underlying inflation is higher than the 1.5 percent overall increase in the CPI."

BusinessDesk, Staff Reporter