RBA must focus on softer jobs market to curb inflation, experts say

Economists say taking the heat out of the jobs market is ‘probably the only thing that the reserve bank can do’ to unstick inflation.

Economists say taking the heat out of the jobs market is ‘probably the only thing the Reserve Bank of Australia can do’ to begin curbing inflation. Picture: NCA NewsWire/Max Mason-Hubers

Economists say taking the heat out of the jobs market is “probably the only thing the Reserve Bank of Australia can do” to begin curbing inflation, with some expecting forecasts in employment and real GDP growth to be reduced in the coming budget.

The higher-than-predicted inflation figures released this week showed consumer prices overall accelerated by 1 per cent in the March quarter, well up on 0.6 per cent in the three months to ­December, and above the 0.8 per cent predicted by economists.

Along with increasing the risk posed by major policies such as the revamped stage three tax cuts, economists said it was clear the inflation numbers meant labour would have to soften.

Economist Saul Eslake said he expected a small reduction in forecasts for GDP and employment in May.

“Obviously in the wake of Wednesday’s numbers, but also in the wake of similar movements in interest rate expectations in the US, the assumptions (the government) will make about interest rates will be less optimistic,” he said. “And that might result in a small, and I wouldn’t think it would be more than a quarter of a percentage point, reductions in their forecast for real GDP growth and employment.”

Mr Eslake said if the RBA was willing “to be patient” in bringing aggregate demand in line with ­aggregate supply, then the impact on employment would be less than “if they moved aggressively”.

Unemployment rose by 0.1 per cent between February and March to sit at 3.8 per cent, with the Australian Bureau of Statistics estimating about 6600 jobs were shed from the economy over the same time.

AMP Capital chief economist Shane Oliver said the best way to tackle the stubbornly high inflation rate was to take the heat out of the labour market. “It’s probably the only thing that the Reserve Bank of Australia can do,” he said.

“So services inflation is where the problem is and the key driver of services question is wages and the jobs market.

AMP Capital chief economist Shane Oliver. Picture: Facebook/AMP

“So the RBA may conclude out of this, well, we’ve got to … double down on trying to drive a weak jobs market, or higher unemployment in other words.

“All the RBA can really focus on is trying to ensure we get a softer jobs market, which means higher unemployment.”

RBA governor Michelle Bullock was blasted last year by unions for declaring “unemployment will have to rise” to bring inflation under control.

Judo Bank chief economic adviser Warren Hogan said it was clear economic demand had to cool before inflation came down.

“Essentially, what you have to do is you have to cool demand in the economy, you have to give the economy some slack, which means that you can’t have strong spending, strong demand for labour, that’s what’s going to take the pressure off inflation,” he said.

“And of course, employment is an absolutely critical element of that.”

Mr Hogan said he predicted two more rate hikes because of the strong employment numbers.

“This is the sort of catch-22 with the government’s strategy on immigration is that a while bringing labour supply in is good for inflation in the medium term, because it takes the pressure off wages, in the short term it keeps demand in the economy,” Mr Hogan said.

“And the RBA is actually trying to take demand out of the ­economy, trying to slow it down and trying to reduce the ability of businesses to put prices up, basically.”