OPINION: This is an edited and abridged extract of a speech given by RBA governor Philip Lowe to the American Chamber of Commerce in Australia in Sydney.
It is a challenging time in the global economy. Most countries, including the United States and Australia, are experiencing the highest rates of inflation for many years.
In underlying terms, the inflation rate was 3.7 per cent, which is higher than it has been in recent years, but still lower than it was during the resources boom. In both headline and underlying terms, inflation is much higher than we had earlier expected. As important as these global influences are, they do not provide a full explanation for higher inflation in Australia.Increasingly, domestic factors are also at play. Following the strong recovery from the pandemic, growth in domestic spending is now testing the ability of the economy to meet the demand for goods and services.
Since early May, petrol prices have risen further due to global developments, and the outlooks for retail electricity and gas prices have been revised higher due to pressures on capacity in that sector. As a result, we are now expecting inflation to peak around 7 per cent in the December quarter. The second factor is a more technical one, but one that we should not lose sight of. It is important to remember that inflation is the rate of change of prices. It is not a measure of the level of prices.
The board is committed to doing what is necessary to ensure that inflation returns to the 2 to 3 per cent target range over time. High inflation damages the economy, reduces the purchasing power of people’s incomes, and devalues people’s savings. It is also regressive, hurting most those who are least well-equipped to protect themselves.So, it is important that we chart our way back to an inflation rate in the 2 to 3 per cent target range. We do not need to, nor can we, get there immediately.
To date, medium-term inflation expectations have been well anchored around 2 to 3 per cent, suggesting that people believe we will get back to target. We want to do what we can to make sure this remains the case., by helping ensure that spending grows broadly in line with the economy’s capacity to produce goods and services. Higher interest rates can also directly affect expectations by demonstrating the commitment of the RBA to return inflation to target.
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