Inflation Return To Target likely To Be “Drawn Out”

Acting Assistant Governor (Economics) Kohler has spoken on the Outlook for the Australian Economy, which ties in closely with the updated projections in Friday’s Statement on Monetary Policy. She reiterated that inflation is “still too high” and the return to target is going to be “more gradual” than originally expected. When asked she noted that while rates are “restrictive”, the question is whether they are restrictive enough to bring inflation back to target. Continued risks to target could force the RBA’s hand again.

• Inflation is higher than the RBA expected due to stronger demand from higher immigration and investment, and higher costs, including from labour. But it should continue moderating as growth is still expected to be below trend over the coming year.
• Goods prices have driven the easing in inflation pressures and should continue moving lower, but domestically-driven services prices remain a problem and the key area to watch. Sticky services prices have been “widespread” and with market services accounting for around 20% of the CPI, they’re important. Kohler observed that services remained elevated due to “still-strong levels of demand” that allow higher costs to be passed on. Low productivity has been a problem pushing up unit labour costs, but the RBA expects it to return to its pre-pandemic trend but a “huge pickup” isn’t expected.
• The recent rise in fuel prices is a reminder that the path of inflation back to target is likely to be a “bumpy” one.
• The unemployment rate should rise driven by below trend growth but employment growth should remain positive over the forecast horizon, although lower than working age population for a time. Hours worked are likely to see a sharper adjustment.
• See speech here.