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Economics update | 24 June 2022
23 Jun 2022
Inflation to peak at 7 per cent by year’s end
In a presentation to the American Chamber of Commerce earlier this week, Reserve Bank Governor Philip Lowe suggested people should be prepared for more pain in the coming months from rising inflation.
The Reserve Bank is now expecting inflation to peak at 7 per cent in the December quarter 2022, then begin to decline early next year. But it will take a couple of years for inflation to return to normal – i.e. within the RBA target range of 2 per cent to 3 per cent. Inflation is increasingly coming from within Australia, rather than a result of global factors, with growth in domestic spending testing the ability of the economy to meet the demands for goods and services, and labour market constraints putting pressure on wages.
We need to be prepared for further increases in the cash rate as the Reserve Bank tries to tame this recent rapid growth in inflation. While indicating that the cash rate may rise above 3 per cent, Dr Lowe said it was unlikely that it would rise to 4 per cent as currently predicted by some investors and market analysts. This would have a “first order effect” on household spending and mortgage repayments, and involve the sharpest tightening of monetary policy in the nation’s history.
Dr Lowe also sent a warning that workers must accept temporary real wage cuts to avoid a 1970s-style wage-price spiral and to stop higher unemployment. He suggested that economy-wide range increases of up to 3.5 per cent were sustainable, but pay rises should not ‘mechanically’ match inflation. This was a clear signal to the Government and the Fair Work Commission following the recent Annual Wage Review which delivered a 5.2 per cent increase for minimum wage employees and a 4.6 per cent increase for workers on modern awards. If wage increases in the 4 per cent to 5 per cent range become common, Dr Lowe indicated its going to be harder to return inflation to 2.5 per cent, and it will require the economy to slow more and the unemployment rate to rise to achieve the target.
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