Higher food and petrol prices, and housing costs, are likely to have pushed inflation to 2.2% in the three months ended March, stronger than previously forecast by the Reserve Bank.
ASB economist Christina Leung said it appeared the Reserve Bank was now less comfortable with the medium-term inflation outlook.
"This is unsurprising in light of the fact that, even excluding for the price effects of the emissions trading scheme, the Reserve Bank forecast annual inflation to track close to the top of the target band of 3% over the coming years," Ms Leung said.
There was little room for inflation surprises, all the more concerning given recent data indicated inflation pressures would build up this year, she said.
Although the appreciation of the New Zealand dollar late last year was likely to have driven the price of imported consumer goods lower, Ms Leung said that this decrease was expected to be offset by the increase in petrol prices.
Petrol prices, estimated to have risen 6% in the quarter, were also expected to have made a substantial contribution to tradeable inflation and the overall consumer price index (CPI) inflation.
Population growth would underpin demand for housing and would support persistent housing-related inflation more generally.
Outside of housing, non-tradeable inflation was expected to rise as firms increased output in response to a recovery in demand, Ms Leung said.
Adding to the emerging capacity pressures in the economy will be administrative inflation that will come through in the third quarter.
The recently announced increases in ACC levies would mean a higher increase in vehicle licensing fees that was typical for a September quarter.
The implementation of the emissions trading scheme would flow through to higher petrol and electricity prices directly and raise the price of energy-intensive goods and services more indirectly, she said.
"While inflation is well-behaved for the time being, we expect the building up of inflation pressures and administrative inflation over the coming year will see annual CPI inflation rise above 3% in 2011."
The Reserve Bank would need to start the tightening cycle in June with a 0.25% increase to lift the official cash rate to 3% in order to keep those inflation pressures in check.
Even with the OCR increases starting from June, stimulatory short-term rates were likely to prevail into early next year and still provide some support to the economy during much of the tightening cycle, Ms Leung said.
In the United States, a top Federal Reserve official said in a speech that he thought the time to drop the Fed's promise to hold rates low for a long time might be drawing nearer.
"A couple of months ago, I was saying I was comfortable with the extended period language," Richmond Federal Reserve Bank president Jeffrey Lacker told reporters after the speech.
"The recent data has made me think that it might be sooner rather than later that we would move that language. It depends on more data coming in," he said.
Mr Lacker is not a voter on the Fed's interest rate-setting panel this year.
The Fed lowered rates to near zero in December 2008 and began promising to keep rates exceptionally low for an extended period soon afterward.
With the economy recovering gradually from a deep and damaging recession, the Fed has said it is in no hurry to tighten borrowing conditions, but many in financial markets believe that dropping the extended period pledge will be the Fed's first step in that direction.
Primary dealers polled by Reuters see a 62% probability of a Fed rate hike by the end of the year.
Mr Lacker said he was not ready just yet to drop the extended period pledge, and he and other Fed officials said in speeches the economy was operating well below full capacity and full recovery was a way off.
"The pain is still with many of us to be sure, and we are a long way from a full recovery," he said.
