Lower petrol prices are expected to to sink first quarter inflation to just 0.1%, taking annual inflation down to 0.2% or 0.3% and remaining well below the Reserve Bank's 1% to 3% target range.
ASB chief economist Nick Tuffley said the consumer price index, the official measure of inflation due out this morning, will give some relief to the central bank which was picking 0% inflation for the year ended March.
''We are forecasting slightly higher first quarter annual inflation than the Reserve Bank allowed for at the March Monetary Policy Statement. The Reserve Bank will remain wary of the headline result, particularly given inflation will remain below the target band over much of 2015.''
Even if inflation was stronger than expected, the central bank had a long way to go before it could be confident inflation pressures were picking up in line with its expectations.
The risks around the official cash rate outlook were still skewed towards a cut, with no hikes on the radar for the foreseeable future, he said.
Westpac senior economist Michael Gordon said the CPI release would be dominated by the steep fall in fuel prices which started late last year and took off in the new year period.
Westpac is picking annual inflation to fall from 0.8% to 0.2%, the slowest pace since 1999, when annual inflation briefly dipped below zero.
''We estimate petrol pump prices were down 11% on average over the quarter and diesel prices were down 17%.''
The drop in fuel prices equated to a 0.6% fall in the CPI, accounted for all of the expected slowdown in annual inflation, he said.
Beyond the plunge in fuel prices, the forecast for the March quarter reflected seasonal influences.
There was a 10% rise in tobacco excise duty, annual rises in education fees and a seasonal food price rises. Those would be partly offset by seasonal falls in overseas airfares and package holidays.
The broader picture remained one of subdued inflation, despite a rapidly growing economy, Mr Gordon said.
The Reserve Bank had said it did not intend to respond to the direct impact of a one off fall in fuel prices. But it was concerned the persistently below target inflation of recent years could become embedded in wage and price setting behaviour, making it harder to return to the 2% target mid point.
In that respect, the non tradeables component of today's release would be of most interest. There were already signs of low nominal wage growth and slower price increases for labour intensive services, in particular, he said.
