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MNI POLICY: RBA Lays Out Potential Future Inflation Triggers

(MNI) Sydney

Inflation could persist if productivity remains weak, firms expand margins as costs ease, higher prices push wages higher than expected, or rents rise faster than anticipated, according to the Reserve Bank of Australia’s Statement on Monetary policy released Friday.

The Reserve noted, while its inflation outlook was largely unchanged (see chart below), the composition has shifted. “Non-housing inflation is expected to be slower because of downgrades to the outlook for activity, the labour market and labour costs,” the statement said. “This is offset, however, by a stronger outlook for rent inflation, reflecting the strength in recent data and the upward revisions to the population growth estimate.”

RBA Governor Philip Lowe stressed Tuesday the Reserve would seek to protect employment gains as it fights inflation (see: MNI: RBA Inflation Strategy to Protect Labour Gains), following its shock 25bp hike to 3.85% (see: MNI RBA WATCH: Shifts Hawkish, Targets Services). The Reserve believes unemployment will remain low for the next two years, while it debates internally how to curtail high rental costs.

In the statement, the Reserve noted inflation could land lower than expected over the coming years “if the easing in goods inflation is faster or more widespread than anticipated, including because consumer spending is weaker.”

DOMESTIC CONDITIONS

The RBA noted the strong wages growth recorded over the March 2023 quarter would likely stabilise at 3.75-4% and moderate over 2023. The delayed implementation of higher award wages in hospitality, tourism and aviation had driven the growth. "Wages in accommodation and food services recorded the largest increase in wages across industries in the quarter," the RBA said (see chart).

The RBA added inflation has peaked across most sectors. "A wide range of items have contributed to the strong inflation outcomes over the past year. The share of the CPI basket growing faster than 3% in annualised terms declined in the March quarter but remains high."


COMPANY PROFITS

Non-mining company profits have not likely contributed to high inflation, with little evidence to show there has been a broad-based increase in domestic profit margins, the RBA said. "At the firm level, there has been little change in the distribution of margins,” the RBA said in the statement. “These observations are consistent with firms having generally passed on higher costs to maintain their profit margins, and aggregate inflation having been driven by the balance of demand and supply factors – rather than changes in firms’ pricing power.”

Daniel covers the Reserve Bank of Australia and the Reserve Bank of New Zealand and leads the Asia-Pacific team.
Daniel covers the Reserve Bank of Australia and the Reserve Bank of New Zealand and leads the Asia-Pacific team.

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