US inflation has hit a 40-year high after food, electricity, and shelter propelled the consumer price index to annual gains of 7.5 per cent last month – the steepest year-on-year increase since February 1982.
Speaking before the House of Representatives standing committee on economics, the Reserve Bank governor, Philip Lowe, conceded that the news out of the US has come as a surprise.
“The sharp pick-up in inflation in parts of the world, especially in the United States, has come as a surprise and is an additional source of uncertainty about the outlook,” Dr Lowe said.
“For the first time in several decades, inflation has become a major issue in the global economy,” he noted.
“In the United States, CPI inflation is running at more than 7 per cent and in the United Kingdom it is expected to be at a similar rate soon. In Germany, inflation is 5.7 per cent and in New Zealand it is 5.9 per cent. These are the highest rates in decades and the higher inflation is turning out to be more persistent than earlier expected.”
He conceded that there is a risk to Australia that foreign central banks will have to increase interest rates, noting “it is entirely possible” that countries will need bigger adjustments than currently anticipated, which could result in an “abrupt adjustment in financial conditions”.
Dr Lower, however, stressed that Australia differs greatly from the United States. Firstly, “we have not seen the same increases in goods prices as have occurred in the United States”, the governor said.
“It is also relevant that the prices that Australian households pay for utilities are little changed and have not gone up sharply like the prices of utilities in Europe. Rent inflation has also been lower in Australia than elsewhere.”
According to the RBA’s central forecast, underlying inflation will increase to 3.25 per cent in the coming quarters before easing to around 2.75 per cent, reflecting the ongoing effects of supply-side disruptions, most recently due to Omicron, at a time of strong demand.
“As these supply-side pressures are resolved, some of the current upward pressure on prices is expected to abate. An offset to this, though, is expected to be stronger growth in labour costs due to the tighter labour market,” Dr Lowe said.
Reiterating the RBA’s preparedness “to be patient”, the governor rejected predictions that interest rates would rise this year, cautioning that moving too soon would put employment gains at risk.
“I recognise that there is a risk to waiting but there is also a risk to moving too early. Over the period ahead we have the opportunity to secure a lower rate of unemployment than was thought possible just a short while ago. Moving too early could put this at risk,” Dr Lowe said.
“The stronger the economy and the more upward pressure on prices and wages, the stronger will be the case for an increase in interest rates.”
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
