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Highlights
- Philip Lowe discusses recent trends in inflation with Australian Business Economists.
- Implications for the RBA's monetary policy in the backdrop
Australia is again worried about inflation as it is no more below the central banks' targets. However, from RBA Governer Lowe's eyes, the undershooting of inflation targets looks like a universal experience. The reasons are complex, like globalisation, advances in technology and shifts in labour market trends. Here is Lowe's take on inflation and monetary policy alignment.
Inflation in Australia-
- Many global factors have pushed inflation in Australia, lifting it up, though less evident.
- Statistics indicate that Inflation was 0.7% in the September quarter and 2.1% from the year beginning till September quarter-end.
- The inflation metric is higher than expected and meagerly above the bottom of RBA's 2% to 3% target band.
- It, however, is lower than the average for the past three decades for the Australian economy.
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Reasons for inflation hike and Outlook-
- The higher price of oil in global markets have impacted the headline inflation rate.
- A shift in consumption patterns is also an evident reason.
- Increased prices of imported goods due to a global goods price hike.
- Lessened domestic retail discounting in response to more robust domestic demand.
- A shift in demand-supply balance in housing is evident in the increased cost of building homes.
- RBA expects underlying inflation to rise further but gradually pushed by normalisation in consumption patterns.
- Central forecasts see Wage Price Index increase by 2½ per cent during 2022 and 3 per cent in 2023. Underlying inflation shall be pegged at 2¼ per cent in 2022 and 2½ per cent during 2023.
Also Read - Australian economy to rise by 5% next year: Philip Lowe
Inflation impact on Monetary policy-
- The recent inflation data is indicative of better-than-expected progress towards RBA's inflation objective. However, underlying inflation has merely returned to the target range in six years.
- Recovery in terms of the real economy is back on track after the interruption caused by COVID-19, Delta outbreak. Thus, RBA expects the unemployment rate to trend lower, at 4 per cent by 2023 end.
- The Reserve Bank Board has not indicated any increase in cash rate until inflation reaches the target range. An important consideration for the board for policy changes will be the developments in the labour market.
Bottom line-
As per the RBA governor, if faster progress continues towards achieving the inflation target, a lift in the cash rate will be seen before 2024.
