Lower than expected inflation in the March quarter should give the Reserve Bank some breathing space before forcing it to increase the official cash rate.
Higher food prices pushed inflation to 0.4% for the March quarter and took the annual consumer price index (CPI) to 2%, much less than commentators were forecasting.
Statistics New Zealand said a 1% rise in food and a 1.1% lift in transport costs during the quarter were inflationary drivers, but these increases were partly offset by lower prices for recreation and culture.
ASB economist Christina Leung said the quarterly CPI was slightly below her expectations, but the softer than expected non-tradeable result should lessen inflationary pressure.
"There was no real smoking gun in the consumer price index release that would point strongly to a June official cash rate increase," she said.
Add in a continued weak housing market and the impact of drought, and she said there was little compelling the Reserve Bank to act until July at the earliest.
A 6.9% increase in petrol prices during the year was a key contributor to the quarterly inflation, but Statistics New Zealand prices manager Chris Pike said had petrol prices stayed the same as in December 2009, the consumer price index would have been unchanged.
Higher prices for dairy products pushed up the grocery segment of the index 1.1%, while fruit and vegetables rose 2.3% and meat, poultry and fish were 1.3% higher.
Mr Pike said food prices rose 0.3% for the year to March 2010, the lowest annual increase since the June 2005 quarter when they rose 0.1%"Although food prices are 1.2% higher than a year ago, they are 10.1% higher than two years ago," Mr Pike said in a statement.
While petrol prices were now at their highest level in 18 months, international airfares fell 8.3% as they typically did in the March quarter following a seasonal rise in December.
Mr Pike said on an annual basis, transport sector prices rose 6.4%, with petrol prices 11.5% higher and second-hand cars up 9.9%.
A 7.6% fall in audiovisual equipment prices helped the recreation and culture segment to record a 1.4% fall in price for the quarter.
Mr Pike said the cost of non-tradeable goods and services, which do not face foreign competition, rose 2.1%, the lowest for more than eight years, while tradeable goods and services, which were imported or faced competition to imported goods, rose 2% on the back of higher prices for fuel and second-hand cars.
Ms Leung said a feature of the data was the 0.2% increase in housing costs, which was more subdued than expected and showing little sign of coming under pressure.
That weakness was also reflected in price declines in consumer goods such as furniture and appliances.
Ms Leung said the New Zealand dollar immediately fell against the United States and Australian currencies, while the short-term bank swap rates immediately dropped about five basis points on the expectation the Reserve Bank would not move on the OCR until July at the earliest,while the 10-year swap dipped about three basis points.
