Falling food prices are expected to show annual inflation is down to 1.9% when Statistics New Zealand figures are released on Wednesday.
ASB chief economist Nick Tuffley said that in contrast to the September quarter, he expected food prices to make a "substantial negative contribution" to the consumer price index - the official measure of inflation - in December.
"This largely reflects the unwinding of the weather-affected strength in vegetable prices that occurred in June.
Furthermore, we expect retail meat prices to decline over the December quarter, reflecting the fall in New Zealand-dollar meat prices in international markets."
ASB expected some of that weakness to be offset by ongoing persistence in inflation in the housing part of the CPI, he said.
While an easing in non-tradeable inflation was expected for December, it was not expected to remain low beyond early this year.
Business surveys in recent months had shown a rebound in building activity, with pricing intentions in the sector almost rising back to pre-recession levels in recent months, Mr Tuffley said.
"As such, we expect a modest rebound in construction costs over the coming year. In addition, rental inflation is expected to lift in light of population growth, which will underpin demand for housing."
Outside of housing, the lingering effects of excess capacity earlier would likely weigh on non-tradeable inflation for December, although there were signs that the excess capacity had been diminishing.
The increased difficulty in finding staff also pointed to a tightening in the labour market, suggesting wage pressures would emerge this year, he said.
ASB expected the strength in the New Zealand dollar over the second half of last year to weigh heavily on tradeable inflation for much of this year.
"Beyond that, we expect the depreciation in the New Zealand dollar to push up the price of imported goods, underpinning tradeable inflation.
"Overall, we expect headline inflation to remain in the top half of the target band from the beginning of 2011."
Against that outlook, the Reserve Bank would need to start reducing monetary stimulus soon, Mr Tuffley said. he expected to see a 0.5% lift in the official cash rate in April.
