RBA governor Philip Lowe has outlined a number of risks to the central bankâs task of returning inflation to target as the monthly consumer price index comes in at a hotter-than-expected 6.8 per cent.
Headline inflation lifted from 6.3 per cent in the year to March to 6.8 per cent in the 12 months through to April.
The head of the Reserve Bank says rents will start to fall when more people form bigger households by bringing in a flatmate or staying at home with their parents.
Dr Lowe said there were two major factors driving prices to eye-watering levels â that people opted for more space during the pandemic, and that the population was booming as borders reopened.
It would take time for new supply to come online to meet the higher demand but that high prices would eventually cause people to âeconomise on housingâ, he added.
âKids donât move out of home because the rent is too expensive or you decide to get a flatmate, thatâs the price mechanism at work,â he told a Senate estimates hearing on Wednesday.
âWe need more people, on average, to live in each dwelling.
âAnd prices do thatâ
Dr Lowe said rents were a âvery significant issueâ as the single largest component of the consumer price index.
âTheyâre very important and weâre expecting growth in rents and, as measured in the CPI, itâd be kind of around close to 10 per cent.â
Inflation expectations, which refers to the rate at which people expect prices to rise in the future, also pose a risk to the central bankâs task of returning inflation to target.
The governor said this was one reason the central bank board decided to hike interest rates in May after pausing for one month in April.
âThere are a whole bunch of reasons we did that, but one of them was to reinforce the idea in the communityâs mind that weâre serious about this, that we will do whatâs necessary to get inflation to come down,â he said.
He was hopeful inflation would continue to come down over the coming quarter and months
âWe really want people to understand that weâre serious about this, that weâll do whatâs necessary, and not to question our commitment to get inflation back down, as painful as that is, weâve got work to do there,â he said.
Weak productivity growth is also weighing on the governorâs mind.
He explained that without productivity growth, unit labour costs are getting too high.
âOver the last three years, there has been no increase in the average output produced per hour worked in Australia â no increase for three years,â Dr Lowe said.
âItâs a problem for the country and itâs a problem for the inflation outlook as well.â
The governor said unit labour costs were growing at the rate of around 3.5 to four per cent and that made it hard to bring inflation back to around 2.5 per cent.
âAnd the best solution to this is a lift in productivity growth.â
Dr Lowe said the reasons for weak productivity growth were complex and that the pandemic had a lot to do with it.
âBusinesses were in survival mode rather than growth mode and investments slowed down and there were disruptions,â he said.
âThatâs now behind us. So perhaps weâll now see productivity growth pick up.â
The central bank started lifting interest rates last year to tackle high inflation.
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Poppy Johnston
(Australian Associated Press)