Services Inflation Still Too High To Achieve Target

Head of Economic Analysis Kohler spoke this morning on “The Outlook for Inflation and Employment”. She emphasised that services inflation needs to moderate for the RBA to meet its inflation target. She also reiterated that there is a lot of uncertainty around the RBA’s inflation projections, especially those further out. Less household saving and higher costs than expected risk the return to target.

• The moderation in price pressures has been driven by goods prices, as is the case across the OECD, and they are expected to stay low in “many categories” but the diversion of shipping away from the Red Sea is a risk.
• While goods prices have been helped by a drop in demand, services demand continues to exceed supply and cost growth in the sector remains high. Businesses are telling the RBA that labour and non-labour costs, such as professional services & insurance, remain elevated. The RBA only expects services inflation to decline gradually going forward.
• Easing wage pressures should help bring labour-intensive services inflation down. The RBA is seeing evidence of moderating wages in some industries.
• Most labour market indicators the RBA looks at are still “tight” compared to history.
• Growth will be “subdued” near-term but it should pick up gradually as real household income growth turns positive as inflation declines. The last of the rate hikes having worked their way into the economy should also help.
• See Kohler’s speech here.