Still have a way to go on inflation: RBA

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

 

Reserve Bank governor Philip Lowe says recent data indicates that Australia is making better-than-expected progress in achieving the two to three per cent inflation target, but “we still have a way to go”.

While at 2.1 per cent in the September quarter, underlying inflation has only just returned to the target band for the first time in six years and is only just above the bottom of the range.

“The inflation outlook is more uncertain than it has been for some time,” Dr Lowe told an Australian Business Economists webinar on Tuesday.

“But our central scenario is that underlying inflation reaches the middle of the target by the end of 2023.”

However, he said this by itself would not warrant an increase in the cash rate and much would depend on the trajectory of the economy at the time.

“It is still plausible that the first increase in the cash rate will not be before 2024,” Dr Lowe said.

He is watching to see whether higher inflation feeds through to inflation expectations and wages.

“It is possible that higher inflation leads workers to seek larger wage increases to compensate them for a loss of purchasing power. This is especially so if workers believe the higher inflation is here to stay,” Dr Lowe said.

He also wants to see how the labour market evolves as the economy opens up and the demand for labour-intensive services increases.

“In Australia we were hitting record highs for participation just before the Delta outbreak and are expected to return to these highs in the coming months,” Dr Lowe said.

He noted consumer price inflation has increased in most advanced economies, with a number now experiencing rates above four per cent, although Asia was an exception, with inflation rising by a small amount in China and Japan.

While Australia had also experienced a lift in inflation, it was also less pronounced than many other countries, he said.

“Most central banks and international organisations have concluded that the increase in inflation is likely to be only temporary,” Dr Lowe said.

He said the key factor driving inflation has been a shift in the balance of demand and supply as a result of the pandemic.

When households were locked down, they had difficulty spending on many household services and switched their spending to goods.

“Rather than taking a trip, going to the gym or eating out, people purchased goods for their homes, including fitting out their home offices and purchasing home exercise equipment,” Dr Lowe said.

“This surge in demand for goods quickly ran up against a supply side that was not flexible enough.”

Very strong demand for goods resulted in a sharp increase in shipping costs around the world, a fall in inventories, increased delivery times and large rises in the prices of many goods, he said.

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