Headline inflation will drop to 4.5 per cent by the end of the year: RBA

But the RBA has warned renters to expect further increases in their accommodation costs "in the year ahead" as a big influx of migrants has added to demand.

In a crucial update on the economic outlook just days out from the federal budget, the Reserve Bank confirmed price pressures have passed their peak and non-housing inflation is slowing as prices for goods moderate.

These developments, combined with an increase in labour supply and an expected easing in wage pressures, have led the central bank to forecast headline inflation will slow more quickly than previously expected, dropping to 6.25 per cent in the June quarter (0.5 of a percentage point lower than predicted three months ago), reach 4.5 per cent by the end of the year and ease to 3.5 per cent around this time next year.

The improved inflation outlook is underpinned by weaker growth prospects.

The RBA expects gross domestic product to increase by just 1.25 per cent this year and 1.75 per cent in 2024.

"Economic activity is expected to have slowed in the March quarter and is forecast to remain subdued through this year as higher interest rates, the higher cost of living and earlier declines in household wealth continue to weigh on growth," the RBA said in its quarterly Statement on Monetary Policy.

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The latest forecasts for growth and inflation are based on the official cash rate already having reached its peak at 3.85 per cent and declining to around 3 per cent by mid-2025.

In its assessment, the RBA said higher energy prices were likely to add 0.25 of a percentage point to inflation next financial year.

The central bank is also wary of the impact of more costly services.

It said services inflation would remain high throughout this year given that labour is a big component of their costs and wages are expected to grow by around 4 per cent this year.

But one of the biggest concerns for the inflation outlook is the cost of rents.

"Rental vacancy rates are low and stronger population growth will contribute to further tightness in the rental market in the period ahead," the central bank said.

"As a result, rental price inflation is expected to increase further over coming quarters as higher rents work their way through the stock of outstanding rental agreements."

The RBA admitted that there was a "high degree of uncertainty" around the inflation outlook.

It said there was a risk that inflation pressures could persist longer than expected, as has been experienced overseas, and that rent inflation could surge higher than anticipated.

But the central bank appeared to be more relaxed about the possibility of a damaging wage-price spiral developing.

Many economists and other observers have criticised RBA governor Philip Lowe and the RBA board for voicing concern about the risk of wages and prices chasing each other upwards given the tight labour market.

Critics have said there is no evidence of an unsustainable acceleration in wages occurring, with the wage price index growing by a moderate 3.3 per cent late last year despite unemployment being stuck around a 50-year-low of 3.5 per cent.

In what amounts to an admission that its concern might have been misplaced, the RBA said "recent outcomes...suggest that the risk that prices and wages start to chase each other is lower than a few months ago".