Despite an alarming jump in Australian petrol prices in the last couple of weeks to new peaks, the Reserve Bank of Australia (RBA) said they are focused on the medium to long-term in regards to inflation.
The latest ANZ-Roy Morgan Consumer Confidence and inflation expectations saw inflation expectations jump 0.3 percentage points to 5 percent, the highest level since December 2014.
“The rise in average petrol prices of more than 10 percent nationally in the past two weeks likely had an impact on household perceptions of price increases,” ANZ head of Australian economics David Plank said.
The RBA often states that it will not increase the cash rate, currently at 0.1 percent, until inflation is “sustainably” within 2 to 3 percent, forecasted for 2024.
Therefore, it is unlikely the central bank will be phased by the latest spike in inflation led by petrol prices, especially while wages growth remain subdued—even in industries experiencing strong labour demand.
“What matters for overall welfare is that people are confident that their savings and their income will not be eaten away by inflation,” RBA governor Philip Lowe told the Universidad De Chile Conference on Oct. 22. “It is also important that saving and investment decisions can be made without inflation figuring prominently on people’s radar screens.”
The National Australia Bank agrees with the RBA’s approach, saying it believes the current lift in global inflation is “transitory.”
“We see little reason for the RBA to rush to hike as early as August 2022, which markets were pricing on Friday [Oct. 22],” NAB director of economics Tapas Strickland said. “Inflation in Australia remains subdued, though recent quarters has lifted off its pandemic lows.”
Strickland said consumers would start to taper spending from the current elevated levels as people learn to live with COVID-19.
“The resultant price increases should reinforce a shift in consumption patterns back towards cheaper services as economies increasingly reopen and services, including travel, resume,” he said.
Strickland also noted that long-term average trends in Australian wages were “even more stark” compared to other countries.
The RBA said that Australia’s pre-pandemic starting point for wage and inflation was lower compared to other economics like the United States and the United Kingdom.
“[RBA board] members concluded their discussion of domestic economic developments by observing that underlying inflation pressures in Australia were more moderate than in other advanced economies,” the RBA October meeting minutes said. “This reflected a range of factors, including the relatively slow rate of wages growth in Australia.”
The RBA noted that while it was possible that underlying inflationary pressures could build more quickly than expected, the current forecast was that inflation would pick up only gradually over the medium term.
Meanwhile the Reserve Bank of New Zealand raised its official interest rate after the consumer prices rose by 2.2 percent in the September quarter, lifting the annual inflation rate to 4.9 percent—the highest level since 2011.
Australia’s quarterly inflation data is due on Wednesday, with Westpac economists expecting an 0.8 percent rise in consumer prices, or an annual rate of 3.1 percent, in line with the RBA’s inflation target. However, forecasts for yearly underlying inflation remain low at 1.9 percent.