‘Bumpy’ road ahead for inflation, senior Reserve Bank official warns

Households and businesses shouldn’t expect the path to curtail persistent price pressures to be quick or direct, the Reserve Bank has warned.

Bringing soaring price pressures to a heel may take longer than expected and could be “bumpy”, a senior Reserve Bank official has warned.

At an address to banking executives on Monday, Marion Kohler, the central bank’s acting chief economist, also cautioned that employees may not be able to work as much as they would like despite the jobless rate remaining at near record lows.

While headway had been made in curbing the costs of goods as global supply chain pressures had eased, Dr Kohler said services inflation – which accounts for energy, rents and labour costs – remained stubborn because of strong domestic demand.

“By contrast, domestically sourced inflation – in particular, services price inflation – has been widespread and slow to decline,” she said.

The RBA has warned that curtailing price pressures going forward could prove ‘bumpy’. Picture: NCA NewsWire / Christian Gilles

Last Tuesday, new RBA governor Michele Bullock oversaw her first rate hike at the helm of the nation’s central bank. The cash rate now sits at 4.35 per cent after the RBA raised rates for a 13th time.

Updated forecasts, also released by the central bank last week, revealed inflation was expected to be 3.5 per cent. Inflation will not return to the RBA’s target band of 2 to 3 per cent by the end of 2025.

Speaking at the UBS Australasia Conference, Dr Kohler said that despite progress made so far – where annual headline inflation has fallen from 7.6 per cent in December 2022 to its current level of 5.4 per cent – it may not fall as rapidly in the months ahead.

“The next stage in bringing inflation back to target is likely to be more drawn out than the first. This has been the experience of some other advanced economies that have been a little ahead of Australia in this inflation cycle,” she said.

Freshly minted RBA governor Michele Bullock has delivered her first rate hike at the helm of the central bank. Picture: NCA NewsWire / Martin Ollman

“The recent increase in fuel prices is also a timely reminder that upside surprises from supply shocks could affect headline inflation. All to say, the road ahead could be bumpy.”

Dr Kohler said the effects of the Covid-19 pandemic “were still evident in two notable developments over the past year”.

“First, a rapid rebound in population boosted GDP growth but had little overall impact on the unemployment rate. And second, poor productivity outcomes added to labour costs. Both developments are also influencing our near-term outlook,” Dr Kohler said.

“More broadly, still-strong levels of demand have allowed businesses to pass on cost increases to customers. Business costs such as energy, rent and insurance have risen strongly, and labour costs have been pushed up by poor productivity outcomes.”

Ahead of fresh wages figures, to be released on Wednesday, which are expected to show a rise in workers’ pay packets due to the government’s intervention in the award and minimum wage determination, Dr Kohler said wages growth would ease in the coming years.

Workers’ pay packets aren’t expected to grow as much in the months ahead. Picture: NCA NewsWire/Simon Bullard

“Wages growth has also picked up over the past year but now appears to have broadly stabilised and is forecast to decline gradually over the next couple of years as labour market conditions ease,” she said.

Despite its punishing round of rate hikes, the RBA expects unemployment will not rise as much as previously anticipated. The updated forecasts show the unemployment rate will increase from 3.6 per cent to 4.25 per cent by the end of 2025.

The acting assistant governor told the conference that a weakening of the jobs market would likely reduce average hours worked rather than increase the unemployment rate.

“This reflects a longer-run structural shift in the way the labour market adjusts during periods of slow growth,” she said.

“Broader labour under utilisation rates are also expected to rise gradually as the labour market moves into balance.

“We currently expect a further gradual easing in the labour market resulting from a period of below-trend growth in aggregate demand for goods and services.”

Originally published as ‘Bumpy’ road ahead for inflation, senior Reserve Bank official warns