Yahoo Finance ‘Genuine uncertainty’: Inflation risks growing, warns RBA
There is “genuine uncertainty” ahead for Australian consumption behaviours and inflation, the Reserve Bank of Australia (RBA) has warned as the country prepares for life after lockdown.
In an address to the Australian Business Economists on Tuesday, RBA governor Philip Lowe noted growing concerns about rising inflation, with the cost of living having increased in most countries outside of Asia over the past year.
Lowe said the shift in supply and demand triggered by the pandemic was behind the increasing inflation, with households spending more on durable goods, rather than services.
“The result was an unprecedented switch in consumption patterns and the effect of this has reverberated throughout the global economy,” he said.
“Modern supply chains are calibrated to operate on a ‘just-in-time’ basis. This reduces the cost of holding inventories, but it means that the global production system is not well suited to a sudden and large shift in demand.
“And there was the added complication that at the same time demand surged, supply was temporarily constrained as governments and firms took steps to contain the virus.”
This triggered a “perfect storm”, but the global economy was moving past the supply issues. Now, the issues were largely due to demand, Lowe said.
Petrol, grocery prices increase in Australia
In Australia, underlying inflation rose 0.7 per cent over the September quarter and 2.1 per cent in the year to the September quarter. And while that figure was higher than the RBA anticipated, it was also still only just within its target band of 2-3 per cent.
The increase in prices is playing out across several sectors, with petrol up 24 per cent in the past year and new car prices growing at their fastest rates since 2001.
Grocery prices were also as much as 15 per cent more than before the pandemic, according to the Institute for Health Transformation.
Uncharted waters
The question now is what happens next, Lowe said.
“There is genuine uncertainty here. It is likely, though, that consumption patterns will return to something more normal,” he said.
This comes down to the fact that as borders soften and restrictions ease, spending is going to shift to travel, eating out and activities, while households aren’t likely to spend as much on goods.
While this could flatten out the demand-supply issues and associated inflation, challenges remain around how the global labour market responds to inflation, with Lowe describing this as a “critical issue”.
“It is unusual to have persistently higher inflation without persistently higher wages growth [unless there is a shift lower in labour productivity growth]. The two generally go together,” he said.
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The RBA governor said he would be watching how the higher inflation interacted with wages and inflation expectations.
Workers’ weaker purchasing power could prompt them to push for higher wages, and if this occurred for a longer period of time, it would fuel the cycle of inflation.
However, Australia didn’t see the same volume of job loss over the COVID-19 pandemic as some other major economies did, and it could slow wage growth.
“Our business liaison suggests that most businesses retain a strong cost-control mindset and are seeking to use measures other than raising base wages to attract and retain staff,” Lowe said.
“There are some jobs that are in very high demand where wages have increased, but we are yet to see a broad-based pick-up in wages growth.”
The RBA predicts wages will grow 2.5 per cent in 2022 and 3 per cent in 2023, with inflation growing 2.25 per cent in 2022 and 2.5 per cent in 2023.
While this takes it into the region where the RBA could consider hiking interest rates, it will need wages to be growing by around 3 per cent to sustain the inflation rate.
“Given the global and domestic forces I have discussed, the inflation outlook is more uncertain than it has been for some time,” Lowe said.
“As I have said, much will depend upon the trajectory of the economy and inflation at the time. It is still plausible that the first increase in the cash rate will not be before 2024.”
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