RBA pushes inflation peak to 8%
The Reserve Bank of Australia (RBA) has admitted it believed inflation rates of 7% had been “consigned to the history books”.
In the most recent quarter, CPI inflation in Australia was 7.3% and Treasurer Jim Chalmers has stated he expects it to peak at 7.75% by the end of the year. The RBA had since pushed this out to 8% before declining to a little above 3% in 2024.
Speaking at a dinner for the Committee for Economic Development Australia (CEDA) on 22 November, RBA governor, Philip Lowe, said he had been “shocked” by the steep rise in Australian inflation.
The current rate was the highest since December 1990 when it was 6.9%.
Lowe said: “This is the first time in many years that your annual dinner is being held against the backdrop of high inflation. For most of the past decade the issue was that inflation was a bit too low, not too high. And for the couple of decades before that, inflation varied from year to year, but averaged 2.5% per cent in Australia.
“An inflation rate of 7% or 8% was something that was widely thought to be consigned to the history books. So the current bout of high inflation has come as quite a shock.”
Inflation had reached almost 18% in 1975 and it was not until early 1990s that it returned to low single-digits. Lowe said the RBA had learnt lessons from this period regarding inflation targeting.
‘The high inflation undermined our prosperity; it eroded people’s savings, distorted resource allocation and increased inequality in our society. This experience also put paid to the idea that by allowing more inflation, we could have more growth and jobs. Rather, the reverse was true. High inflation meant lower growth, fewer jobs and lower real wages.
“Another lesson from these decades is that bringing inflation back down again after it becomes ingrained in people’s expectations is very costly and almost certainly involves a recession.”
Regarding future action by the RBA, Lowe reiterated the central bank was committed to returning inflation to its 2%-3% target and would consider interest rates of 50bps if necessary.
“We understand that many people are finding the rise in interest rates difficult. It is necessary, though, to ensure that the current period of higher inflation is only temporary. As I spoke about earlier, if high inflation were to persist, all Australians would pay a heavy price.
“We have not ruled out returning to 50 basis point increases if that is necessary. Nor have we ruled out keeping rates unchanged for a time as we assess the state of the economy and the outlook for inflation. The board’s priority is to return inflation to target over time. It is resolute in its determination to make sure that this current period of high inflation is only temporary.”
AUTHOR
Laura Dew
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