The consumer price index (the official measure of inflation) grew by 0.6% in June, bringing annual inflation down to 1.9%.
The annual increase is the smallest since the September 2007 quarter.
"Given the depth of the current recession, we expect the Reserve Bank will have some tolerance for inflation printing stronger than its June expectations.
"Inflation below the target band is a greater concern in the near-term for central banks," ASB chief economist Nick Tuffley said.
Resource constraints were slipping away at a dramatic pace, highlighting sustained contraction in the economy would filter through to inflation.
Most indicators in recent business surveys pointed to subdued price and cost pressures over 2009, he said.
ABN Amro Craigs broker Peter McIntyre said interest rates were up around 0.5% across curve after the inflation figures were released.
New Zealand currency was stable, and financial markets were showing more interest from the United States reporting season than the CPI, as it came in close to market expectations.
The market was also awaiting China GDP numbers which showed China's economic growth accelerating in the second quarter, making the Government's 8% full-year growth target possible, he said.
Statistics New Zealand figures showed that non-tradeable inflation in this country lifted 3.3% in the year, slightly weaker than market forecasts.
Significant influences in the June quarter were food and transport.
Transport prices rose 0.6%, due mainly to higher prices for petrol and the purchase of second-hand cars.
Food prices rose 0.9% in the quarter, printing stronger than expected through higher vegetable prices.
ANZ-National Bank chief economist Cameron Bagrie said one major surprise in the figures for him was the lack of retail discounting in the quarter.
"In fact, the majority of retail-related components actually recorded pricing increases in the quarter. Anecdotes of large discounting by retailers were not picked up in official CPI numbers."
Clothing and footwear prices rose 1.8% - the largest quarterly increase in a decade - and prices for the household contents and services group rose 1.5%.
Even car prices were up a strong 4.1% in the quarter.
"Perhaps some of the increases can be explained by a pull-back following price decreases over previous quarters for some components. However, it is more likely to be the weaker currency putting upward pressure on retail prices."
Mr Bagrie was anticipating more of that to be absorbed within margins rather than being passed on.
The New Zealand Manufacturers and Exporters Association said the inflation figures put more pressure on the Reserve Bank to lower the official cash rate to put downward pressure on the currency and apply more than just verbal pressure on the banks to drop interest costs.
Association chief executive John Walley said there was an expectation that inflation could drop below the target zone (1% to 3%) in September.
It was difficult to see how a cash rate above so many of New Zealand's competitors could be justified.
"High interest rates and bewilderingly positive comments about the New Zealand economy are continuing to sustain a higher than workable exchange rate. Don't anticipate much investment or many new jobs in the tradeable sector while these conditions persist."
The next official cash rate announcement is on July 30, with economists expecting it to stay at 2.5% before falling in September to 2%.
