Inflation and interest rates will grab the headlines in Australia this week with the all important June quarter consumer price index figures due out on Wednesday.

That's after the producer price figures are released later this morning.

Export and import price indexes on Friday showed another sharp rise in the country's terms of trade in the June quarter, despite the impact of the stronger dollar.

The high value of the dollar will be a major positive factor in restraining the rise in the PPI and CPI in the quarter.

Economists forecast a fall in the inflation rate from 1.6% in the March quarter to less than 1% in the three months to June 30.

For example, the AMP's chief economist Dr Shane Oliver sees a headline CPI rate of 0.7% for the quarter, giving an annual rate for the 2010-11 financial year of 3.4%.

Economists at the NAB also see a headline rate of 0.7% for the quarter.

Others see a rise of 0.8%.

The figures will be used by the RBA staff to prepare new forecasts for inflation and growth to be presented at tomorrow week's RBA board meeting, and the third State of Monetary Policy to be released Friday week.

But with RBA Governor Glenn Stevens speaking in Sydney tomorrow (it's an annual speech for a charity), his comments on the economy might help sort out the prospects for a rate rise, but don't depend on it.

But importantly, the Reserve Bank's measures of underlying inflation are expected to show a fall as well with the annual rate dropping under the 3% upper level of the RBA's inflation target range.

Dr Oliver sees the underlying rate falling to 0.7% and the underlying annual rate to 2.5%.

"The expected moderation in the quarterly pace of inflation will likely reflect a slower increase in food prices after the boost from the floods in the March quarter, slower increases in petrol prices, slower seasonal increases in health and education costs and ongoing discounting in consumer discretionary items," Dr Oliver wrote on Friday.

The National Australia Bank wrote in a special note on Friday that ,"The RBA has acknowledged that the June quarter CPI outcome, to be released next week, "would be important in helping to shape views about inflation, and therefore the future path of interest rates".

"Models have not been great in predicting core CPI recently but tend to suggest an outcome of around 0.7% - which is our forecast.

"The risk may well be on the down side as many indicators suggest the March quarter was surprisingly high.

"That said, only a very high outcome of say above 1% could seriously put a near-term rate rise back on the agenda.

"We still see the economy as accelerating into late 2011 - after a temporary slower patch - which will see unemployment falling to 4.5% and the RBA taking out further insurance via a 25 point rise in Dec 2011.

"By that time our forecasts also have core inflation at 3%. Our forecasts also see the need for a final adjustment of 25 points in May 2012 prior to the introduction of the carbon tax.

"Only a recession would likely bring on near term rate cuts - an outcome we judge highly unlikely," the NAB said.

"Recent weakness in economic data releases suggest that inflation may not have accelerated in the June quarter, which would provide the RBA with some additional time to look through the current economic murkiness and to assess the true strength in underlying activity.

"The main challenge faced by the RBA will be finding an appropriate policy setting for a multi-speed economy that is about to embark on a mining investment boom, while preventing worsening conditions in already struggling retail, manufacturing, wholesale and construction industries.

"Despite some recent softness, we expect the economy to bounce back from the flood-induced slowdown, and as the mining boom gathers pace, further strengthening of an already tight labour market will eventuate, which will feed into wage and cost pressures.

"As such, the medium-term outlook is consistent with rising price pressures and further tightening of monetary policy will be required to prevent the inflation genie from getting out of the bottle." the NAB added.

The import and export price figures show the terms of trade hit a new high in the June quarter.

The terms of trade is an index of the ratio of export prices to import prices. High export prices boost domestic income and encourage investment in export industries, while lower import prices mean the buying power of the nation's income is boosted even more.

Figures from the Australian Bureau of Statistics on Friday showed the export price index rose by 6% in the June quarter while import prices rose by 0.8%.

Over the year to June, the export price index was up by 10.5%, while the import price index actually fell back by 1%.

Westpac economists said the terms of trade "moved higher over the first half of 2011 as the world continued to pay more for our exports, notably, for our key commodity exports.

"The terms of trade for goods increased by 5.2% in Q2, to be 11.7% higher over the year.

"Indeed, the goods terms of trade is up 35% over the last seven quarters, from the low of Q3 2009, and is now 5% above the peak at the end of 2008.

"The export price index increased by 6.0% in Q2 as global commodity prices rose (up 11.7% in USD terms).

"The higher Australian dollar (up 5.7% against the USD) was a constraining factor.

"Import prices rose by 0.8%. The stronger currency (+3.6% on a TWI basis) was more than offset by sharply higher global oil prices."

Westpac said that the terms of trade is set to moderate over the second half of this year, reflecting slower global growth.

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