Managing expectations key to inflation control: RBA

‘Inflation expectations’ appears 100 times in the RBA’s September Bulletin, up from just two times in the June edition.

Two academic studies on inflation by the Reserve Bank have highlighted the importance of keeping inflation expectations under control as inflation rates in the West rise at the fastest pace in decades and the central bank faces an independent review of its policy decisions and process.

The September edition of the central bank’s quarterly Bulletin published articles from RBA researchers, including one on “Sentiment, Uncertainty and Households’ Inflation Expectations” and another on “Wage-price Dynamics in a High-inflation Environment: The International Evidence”.

RBA economists Yahdullah Hidari and Gulnara Nolan, examine the relationship between sentiment, uncertainty and households’ inflation expectations in Australia, and consider how this uncertainty might be addressed. They say “targeted and clear communication about inflation can help to reduce uncertainty and provide consumers with a better understanding of the path of future inflation.”

The pair also note that high inflation expectations can have “significant consequences for the economy as a whole, and can become self-reinforcing”, and inflation expectations of Australian households are persistently higher than actual inflation.

“This is partly because when they are more uncertain about the economy, they tend to report their inflation expectations in round multiples of 5 per cent, which is higher than inflation has averaged over recent decades,” the economists say. “In addition, there is a negative relationship between consumer sentiment and inflation expectations.”

‘Inflation expectations’ appears 100 times in the September Bulletin, up from just two times in the June edition.

Consumer sentiment rose slightly in September – its first rise in 10 months – but remained around levels last seen in the depths of the Covid-19 pandemic and the Global Financial Crisis, according to the latest report from Westpac and The Melbourne Institute this week.

In an article on wage-price dynamics, RBA economists Neyavan Suthaharan and Joanna Bleakley, look at the risk of a “wage-price” spiral forming amid multi-decade highs in inflation.

The pair find that the current episode has “many differences to the 1970s, when a wage-price spiral did emerge” and central banks are “now focused on ensuring inflation remains low, medium-term inflation expectations remain anchored and structural changes in the labour market reduce the likelihood that wages and inflation “chase each other”.

“Nonetheless, authorities need to be mindful of the risk of a wage-price spiral,” the economists say.

It comes as the Reserve Bank board, led by Philip Lowe faces the prospect of a new era of accountability, with Australians to be told which individual board members voted in favour of rate hikes under reform proposals to be examined by the RBA review.

A three-member panel charged with conducting the first broad review of the central bank in 30 years will release an issues paper on Thursday that covers several potential reforms, including the appropriateness of its current inflation target, where its staff are located and policy responses to deal with price pressures caused by supply shortages.

Originally published as Managing expectations key to inflation control: RBA