Reserve Bank Governor Philip Lowe said he is paying close attention to Australians’ inflation psychology in order to determine whether temporary price spikes come to be seen by the public as more permanent.
“If that shift were to occur, inflation would be higher and would be more persistent and we’d have to respond to that over time,” the governor said in response to questions following his opening address to the Australian Banking Association on Friday.
Inflation in Australia has accelerated, as in much of the developed world, in response to supply chain disruptions. Those price gains are now likely to be further prolonged by Russia’s invasion of Ukraine and the associated jump in energy costs.
But Lowe expects this will wash through the economy in time and maintains that only faster wages growth will keep inflation sustainably to the RBA’s 2-3% target.
“It’s possible that a period of protracted headline inflation will see this psychology shift and firms will decide they’ll have to put up their prices if their costs are rising and they can afford to pay higher wages,” Lowe said. “We are watching very carefully for any shift in inflation psychology.”
Australia’s headline inflation in the final three months of 2021 was 3.5%, while wages growth in the period was 2.3%. The key underlying trimmed mean CPI measure came in at 2.6%, the first time it’s been above the midpoint of the target since 2014.
Interest rates currently stand at a record-low 0.1% and markets are currently pricing a first hike in June, while most economists expect an August move.
Lowe kept his options open on policy again today. He said that given the global backdrop and the state of local labor costs “it’s plausible that interest rates will increase this year. It’s not guaranteed, but it’s plausible.”
The governor also said there were plausible scenarios where rates didn’t rise until next year.
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