Inflation in the three months ended June was softer that expected by financial markets but economists are warning that big increases are ahead.
The consumer price index (CPI), the official measure of inflation, rose 0.3% in June, taking the annual rate to 1.8%, Statistics New Zealand figures showed.
The New Zealand dollar tumbled after the data was released at 10.45am, falling from around US72.70c to around US72.30c within 40 minutes.
The rise in the CPI was dominated by the increase in tobacco excise taxes and higher used car prices.
Tobacco prices increased 8.7% in the quarter and used car prices rose 2.4%.
The June quarter rise in cigarette and tobacco prices was the largest quarterly rise in a decade.
For the year, secondhand car prices rose 7.7%, local authority rates and payments were up 5.9%, and rentals for housing rose 1.4%.
Large quarterly falls for computing and visual equipment (down 4.6%) and domestic airfares (down 1.8%) provided an offset to the rises, ANZ-National bank chief economist Cameron Bagrie said.
"While slightly more items increased in price relative to the March quarter, it was the second-lowest proportion in the decade."
The proportion of items recording price falls remained close to a decade high, he said.
Inflation from the troublesome housing group remained constrained. Rents rose 0.5% in the quarter.
If there was a housing shortage in the country, rents would be up strongly by now, Mr Bagrie said.
Construction costs also remained well contained, rising 0.4%. Given rising prices for building materials, that suggested construction firms were absorbing some of those increases.
The third and fourth quarter CPI results would be pushed higher because of Government policy changes - the emissions trading scheme, vehicle licensing fees and the GST increase. Headline inflation was set to go above 5%.
"Moreover, high food commodity prices suggest that food prices are likely to make a sizeable positive contribution to CPI inflation over the coming months."
The latest CPI details suggested firms lacked pricing power, Mr Bagrie said. However, the Reserve Bank would remain wary about firms seeking to claw back margins by increasing prices to a greater amount than the GST rise. Whether demand was sufficiently firm for that to occur remained to be seen.
The central bank would be alert to any signs of that sort of spillover into pricing behaviour, as well as wage bargaining.
Mr Bagrie expected the Reserve Bank to increase its official cash rate to 3% on July 29, followed by another rise in September before it paused later in the year.
