Economy resilient, but inflation uncertain

The Reserve Bank believes the economy remained resilient in the face of the Omicron variant and activity is expected to pick-up, but the war in Ukraine has cast a cloud over the inflation outlook.

The Australian Bureau of Statistics will issue its household impacts of COVID-19 survey for February on Wednesday, which will show the affects of the Omicron outbreak on Australians.

In the minutes of its March 1 board meeting released on Tuesday, the RBA noted that while inflation was still lower than in many other countries, underlying inflation in Australia was expected to increase further over coming quarters.

However, it said there were uncertainties about how persistent the pick-up in inflation would be given the war in Ukraine and recent developments in global energy markets.

For Australia, where petrol prices continue to set new records, inflation expectations hit their highest level in nearly a decade at 5.6 per cent.

Inflation expectations can in themselves create price pressures as workers chase higher wages as compensation.

The Australian Institute of Petroleum said in its weekly report released on Tuesday that the national average petrol price soared 13.7 cents to a record 197.6 cents a litre.

Prices ranged from 184.9 cents to 211.1 cents during the course of the week ending March 13.

While the RBA forecasts the unemployment rate to fall below four per cent this year, and to levels not seen since the early-to-mid-1970s, wages growth is expected to pick up only gradually.

However, board members agreed the risks to the outlook for wages growth were skewed to the upside.

In the meantime, the board stuck to the script of being patient before lifting the cash rate as it monitors how the various factors affecting inflation in Australia evolve.

The Westpac-Melbourne Institute leading index for February is also released on Wednesday.

It provides a guide to how the economy may perform three to nine months into the future.

 

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

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