A strong New Zealand dollar and "outright deflation" in parts of the economy are expected to see inflation fall to the lowest level since the 1990s.
Tomorrow Statistics New Zealand will release the consumer price index - the most commonly used measure of inflation - for the June quarter, with polls by Bloom berg and Dow Jones last week both forecasting an increase of 0.5 per cent.
That would see inflation for the year to June 30 drop to 1.1 per cent, the lowest level since 1999, the same year the Reserve Bank made targeting inflation its primary monetary policy objective.
It will also continue the dramatic fall in the rate of cost of living increases; a year ago this week inflation hit a 21-year high of 5.3 per cent, boosted by surging commodity prices and the Government's decision to raise GST to 15 per cent.
With commodities now falling, and the kiwi making all imports cheaper, inflation is now subdued.
"Outside of the construction sector, there really isn't much inflation in the economy at all," said Dominick Stephens, chief economist at Westpac, who forecast a 0.6 per cent increase in the CPI.
While demand created by the rebuild of Christchurch is expected to create inflationary pressure in 2013 as the cost of labour and construction materials climbs, economists are increasingly tipping a period of unusually low inflation.
This is likely to allow the Reserve Bank to leave the official cash rate on hold until at least the start of next year.
Earlier this month BNZ released forecasts predicting the CPI would fall to 0.9 per cent in the third quarter of this year, which would mean inflation falling below the Reserve Bank's target band, currently 1-3 per cent, for the first time.
ANZ economist Mark Smith said on Friday that the bank was forecasting inflation would fall to around 1 per cent in the September quarter.
Part of the reason inflation is expected to be at all positive in the June quarter was near record petrol prices for much of the period.
However, petrol prices tumbled in late May and, if they remain stable, could knock 0.5 from inflation in the September quarter.
Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research, said last week's Quarterly Survey of Business Opinion revealed "outright deflation" in parts of the retail sector, as large companies battled for market share in the face of weak consumer demand.
Eaqub said that the major threat the economy was facing was offshore, and if turmoil built there was a risk of very low inflation, or even deflation, over the next two years.
"I don't buy that a supply shock in one region of New Zealand is going to raise prices right across the country," Eaqub said.
"I just can't see it happening."
http://www.stuff.co.nz/business/industries/7282685/Kiwi-weak-demand-subdue-inflation
