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Inflation expected to climb inexorably

Last updated 05:00 14/04/2014

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Annual inflation is expected to be steady at 1.6 per cent in figures out this week but that will not stop the Reserve Bank lifting interest rates this month.

Westpac Bank economists are expecting March quarterly inflation of about 0.4 per cent and an annual rate of 1.6 per cent, when official figures are released on Wednesday.

If it hits 1.7 per cent, as some economists expect, it would be the highest rate of inflation for a couple of years.

But that would only be a "breather" for inflation with price rises expected to move back up to and beyond the Reserve Bank's 2 per cent target midpoint in the next couple of years.

So the Reserve Bank is still expected to lift official interest rates steadily, with the next move up to 3 per cent on April 24.

The Reserve Bank last month lifted rates to 2.75 per cent but rates could reach 5 per cent in a couple of years.

As the economy is expected to soon be growing at its fastest pace for a decade, perhaps 4 per cent or better, economists say inflation will pick up, too. The Reserve Bank wants to keep a lid on rising prices, so economic growth can continue for as long as possible.

The economy is being boosted by the Canterbury quake rebuild, high export prices, strong net migration, strong jobs growth and low interest rates.

Weak food prices are helping to keep inflation in check for now but general prices are expected to pick up as the economy gains more steam and the impact of a high dollar on imports starts to fade, Westpac said.

"We'll be looking for evidence of home-grown inflation as the economy starts to use up its spare capacity," Westpac said.

There was already a distinct housing-related flavour to price rises, which had been strongest in Canterbury but is increasingly spreading to the rest of the country. The Reserve Bank was well aware domestic inflation tended to follow economic upswings with a time delay.

"Once allowed to develop they can be difficult to drive out again," Westpac said.

Figures out on Friday showed food prices down 0.3 per cent in March, a slightly bigger fall than some economists expected. For the past year, food prices are up 1.2 per cent.

And the dollar remains high, trading at about US86.3 cents late on Friday, down from a recent peak of about US87.4c.

A rising dollar makes imports like petrol and cars cheaper, and has been a factor in lower prices for electronics like TVs and computers and imported clothes.

Unemployment is expected to drop from 6 per cent to 5 per cent or less.

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