Inflation looks set to have fallen below the middle of the Reserve Bank's 1-3% target range during the June quarter, according to bank economists. The market is expecting quarterly inflation to rise by around 0.5% from March, with an annual rate of around 1.8%.

Annual inflation was 3% in the March quarter, having fallen from a recent high of 5.1% in September last year. The Consumer Price Index (CPI) for the June quarter is set to be released at 10:45am on Thursday July 16.

Westpac economists said they expected quarterly inflation to be 0.4%, with an annual rate of 1.7% from June last year. They expect a rise transport prices to make the biggest contribution to the figures, with household related prices being the second largest contributor to price growth.

Westpac economists said a notable feature of the June CPI outlook is that food prices are expected to show no inflation over the quarter.

"If so, this would be a marked change from recent years. Food prices have lifted on average 1.7% per quarter over the past 2 years reflecting world trends. This has added an average 0.3 percentage points per quarter to headline inflation over this period. This inflation is expected to end in Q2 and an important part of the expected pull back in overall inflation," they said.

ANZ National economists are expecting headline inflation to be 0.3% from the previous quarter and 1.6% year-on-year. They expect a rise in petrol prices over the quarter will put upward pressure on the headline figure.

"The weak domestic economy, the opening up of significant spare capacity and a turn in the labour market are now clearly manifesting in reduced pricing pressure in NZ," ANZ National economists said.

"Construction prices (a key source of inflation during the upswing) are expected to rise by a modest 0.2 percent in the quarter, taking annual growth to just 1.3 percent. Rents are expected to rise by a similar magnitude. Petrol prices rose by 3.5 percent in the June quarter and see petrol make a 0.2 percentage point contribution to the quarterly increase in the CPI," they said.

ASB economists expect inflation to be slightly higher than the others, with quarterly inflation of 0.6% and an annual rate of 2% followed by an annual 1.3% rise in September.

"Inflation continues to fall sharply from 2008's petrol-induced peak, and the unravelling of the spike will drive the annual inflation rate down further in the September quarter. However, masked by the gyrations in the headline rate lies a gradual reduction in underlying inflation pressures. The marked weakening underway in the labour market will pare wage growth considerably," they said.

"Furthermore, anecdotes suggest a greater prevalence for employers and employees to agree to wage freezes in order to minimise job losses. Housing construction cost increases have now started to moderate in the wake of considerable falls in building work, and will contribute to lower inflation over the next year. Pricing power is also going to remain weak in the current environment."

prices/consumer