Runaway Inflation the dark horse nobody’s cheering on

RBA governor Philip Lowe. Picture: AAP

Short-priced favourite Whatever It Takes got the nod in the 2.30 at Hobart on Tuesday, as the ­Reserve Bank’s spring raising ­carnival ventured to Tasmania.

But the persistent nag to watch in the straight is Runaway ­Inflation, now tipped by the central bank to gallop to 8 per cent this year.

Even Keel is having a spell this season, with connections revealing uncertainty over its form means it only has a narrow path next year to return to the winners’ circle.

The RBA’s seventh consecutive move in this aggressive hiking cycle, from a cash-rate target of 0.1 per cent at the start of May to 2.85 per cent, won’t be its last.

In his statement, RBA governor Philip Lowe said the board “expects to increase interest rates further over the period ahead”.

Some economists believe that a “terminal rate” of around 3.6 per cent is in prospect before the middle of next year, in an economy that is still battling high inflation, even as home values tumble and unemployment rises.

The RBA has pared back its forecasts for growth in gross ­domestic product: to 3 per cent this year, followed by a couple years of Euro-style shuffling at 1.5 per cent, as higher rates bite and the global economy stalls.

Unemployment is expected to gradually rise to a little above 4 per cent by 2024.

All things considered, this would be a tolerable outcome given we’re effectively at full ­employment at the current 3.5 per cent. But it’s the “evil” of inflation, as Lowe calls it, that must be ­corralled.

The RBA’s central forecast is for headline inflation to be around 4.75 per cent over 2023 and a little above 3 per cent over 2024.

That’s just above the bank’s mandate of 2 to 3 per cent.

What’s next?

In a speech on Tuesday night, Lowe explained the recent change of pace from four straight 50-basis-point moves to the 25-basis-point rises at each of the RBA’s past two meetings.

The faster tempo was to get away quickly from the pandemic’s emergency settings, while the ­recent business-as-usual moves would allow the bank to assess what effect the sharp tightening was having on spending, wages, prices and the labour market.

“If we need to step up to larger increases again to secure the ­return of inflation to target, we will do that,” he said. “Similarly, if the situation ­requires us to hold steady for a while, we will do that.

“Given the uncertainties ­regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer.”

It will be a summer of household pain, no doubt made worse for many by La Nina, another dark horse, along with Bill Shock.

If high inflation becomes ­entrenched amid a change in community expectations about prices and wages, that would mean even higher rates.

As Lowe warned, “this would increase the risk of a severe ­recession and a sharp rise in ­unemployment”.

That’s why Jim Chalmers kept a lid on cost-of-living relief in last week’s budget.

Fiscal policy has to keep working in harness with monetary policy to fight inflation.

But demands on Labor to “ease the squeeze” on families have, ­really, only just sprung out of the gates.