New Zealand's annual inflation has fallen to its lowest level in almost three years.

According to figures published by Stats NZ, consumer prices rose 0.6% in Q1, to bring the annual rate down to 4.0%, the lowest seen since June 2021.

The figures matched economists' forecasts but surpassed the Reserve Bank of New Zealand's (RBNZ) prediction of a 0.4% quarterly increase and an annual 3.8% annual rate.

Within its latest monetary review last week, the central bank said inflation was stubborn in certain sectors, meaning interest rates had to remain high.

That said, the RBNZ is confident it would return to within the 1-3% target range by the end of this year.

Increasing rental prices, taxes, the construction of new homes, household energy expenses, and the costs of alcohol and tobacco were the primary factors contributing to inflation, which offset the lower transportation expenses, RNZ reports.

 Furthermore, in terms of the inflation data, Kiwibank chief economist Jarrod Kerr said it was "not as good as the headline suggests."

"But the domestically generated inflation surprised on the upside. Non-tradables fell just 0.1% to 5.8%. It's not enough," he added.

"The stuff the RBNZ is trying to restrain is proving to be even more frustrating. Services inflation actually lifted to 5.3% from 4.7%. Whereas construction costs did a little more, falling from 4.8% to 4.5%."

The Kiwibank economist went on to say that the underlying trend was significant for the central bank and forecast inflation to return to the 1-3% target by Q3.

"Core inflation - removing volatile prices - appears to have peaked in late 2022, and currently sits at 4.1%. The core measure was unchanged to 4.1%, whereas we had expected a slight fall. We expect the downtrend to recommence next quarter," Kerr commented.

Whereas ASB senior economist, Kim Mundy said the central bank would be cautious of the risk inflation would remain over 3%, and forecasts it would wait until February next year to lower the official cash rate (OCR).

"The ongoing strength in domestically-generated inflation was evident and will reinforce the RBNZ's cautious stance," Mundy stated.

"We don't think the data suggest the RBNZ needs to do more, so to speak. Activity data are very weak and highlight that monetary policy is working."