Aussies need to prepare for higher prices and lower wages, Reserve Bank (RBA) governor Philip Lowe has said.
Wages are currently lagging behind inflation, but Lowe said workers shouldn’t expect a pay rise to compensate for this.
"If we all buy into the idea that wages have to go up to compensate people for inflation, it will be painful, so best avoid that,” he said in a speech last night.
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The central bank is expecting inflation to peak later this year around 8 per cent and then gradually decline over the next couple of years to be a little above 3 per cent by the end of 2024.
Lowe warned inflation would become more volatile over the coming years, due to factors like reverse globalisation, fewer working age people, climate change and the transition to renewable energy.
“All four of these supply-side developments are first-order issues that are likely to affect the environment for Australian business over the years ahead,” he said.
“They are also likely to affect the inflation dynamic here and elsewhere, leading to more variability in inflation from year to year.”
The frequency of extreme weather and climate events would continue, Lowe said, and this would push up the prices for food and disrupt the production of commodities and the transport and logistics industries.
“Over the past 20 years, the number of major floods has doubled and the frequency of extreme heatwaves and droughts has also increased significantly,” Lowe said.
“These climate events disrupt production and they affect prices. We know this all too well in Australia, where recent floods are one of the factors pushing inflation up at present.”
The transition to renewable energy could also bring “higher and more volatile energy prices”, he warned.
Origin Energy chief executive Frank Calabria also issued similar warnings on Tuesday. He said the transition would lead to increased energy bills, given the amount of investment required.