Inflation in the non-tradables sector showed some gradual easing over 2005 and 2006, but rose slightly in March to remain around 4 percent. Construction cost increases, stemming from resource pressures in the construction sector, have been a key driver of non-tradables inflation this cycle. Construction cost inflation increased slightly in the March quarter, but remains below average levels seen over the past three years. Rental inflation and the non-housing components of non-tradables inflation also increased in the March quarter, and remain very high.
While there has been some easing in measures of core inflation recently, these remain close to the top of the 1 to 3 percent inflation band.
Inflation expectations drifted higher over 2006, largely in line with high headline inflation at the time. Encouragingly, longer-term inflation expectations subsequently eased towards the end of 2006 and start of 2007, but remained largely unchanged in the June quarter. As a result, measures of inflation expectations remain at the upper end of the 1 to 3 percent target range.