Minor shift in inflation expectations risks RBAā€™s path

Consumers and businesses still believe the stint of high inflation will be temporary, and the Reserve Bank of Australia says its important it stays that way.

Even a modest uptick in whatā€™s known as inflation expectations would make it ā€œsignificantly more challengingā€ to bring inflation back to target in a timely fashion, based on research by the central bankā€™s staff.

The research on inflation expectations ā€“ the rate at which consumers and businesses foresee prices moving in the future ā€“ was presented to board members ahead of the November meeting.

ā€œMembers also observed that, while longer term inflation expectations remained broadly anchored, there had been signs of a slight upward drift in some financial market measures of inflation expectations,ā€ the minutes read.

ā€œIf sustained, this would contribute to higher inflation.ā€

The minutes, released on Tuesday, detailed the thinking behind lifting interest rates by another 25 basis points, to 4.35 per cent.

The increase was the 13th in the hiking cycle prompted by fast-rising consumer prices.

The central bank has also kept the door open to more tightening, if needed.

The minutes confirmed strength in underlying inflation underpinned the November call, with domestically generated pressures contributing to price rises across a ā€œwide rangeā€ of goods and services.

Board members noted that inflation was most apparent in items that were hard to bring down, such as services.

Domestic demand had also proved more resilient than expected, with the tight labour market and high levels of employment helping to support spending.

RBA board members observed that the surge in population growth in Australia over the prior year was making it more challenging to assess the underlying resilience of the economy.

Reserve Bank governor Michele Bullock provided more detail about the source of inflation during a panel discussion on Tuesday.

She said there was a perception the latest bout of high inflation was only driven by supply shocks, which have triggered price growth in things such as petrol, energy and rents.

ā€œBut actually, thereā€™s an underlying demand component to it as well and thatā€™s what the central banks are trying to get on top of,ā€ she said while appearing on a panel at the ASIC annual forum on Tuesday.

Consumers are reining in their spending, based on Commonwealth Bank payments data released on Tuesday, though consumption habits differ markedly across demographic groups.

Young people are contracting their spending the most ā€“ reflecting higher rents and rising mortgage repayments ā€“ with retirees still found to be spending more than price growth.

During the panel appearance, Ms Bullock took the opportunity to welcome the ā€œfabulous performanceā€ of the labour market, with unemployment levels hovering well below long run averages.

She remains confident gains in the jobs market, including better employment opportunities for young people and women, can be maintained as the battle against high inflation rages on.

Speaking at the same conference, Treasurer Jim Chalmers also welcomed the strength of the labour market.

He said the rebound in migration was helping to underpin strength in the services sectors.

ā€œYou will understand and appreciate that migration has recovered quite quickly from that big hole,ā€ he said.

ā€œIt is helping when it comes to services exports, itā€™s helping when it comes to the budget, but itā€™s putting pressure obviously, on communities as well. We are conscious of that.ā€


Poppy Johnston
(Australian Associated Press)


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Categories: Finance