RBA: Persistent High Inflation Could Lead To Shift In Wage, Price Setting Behaviour
- Published on
- 04 Nov 2022, 11:45 AM
--Inflation is currently too high
--Global financial conditions have already tightened noticeably
--Inflation composition expected to shift, with higher inflation in more persistent and non-discretionary
--Liaison indicates higher inflation are factor in current wage negotiations
--Retailers have indicated more willing to pass on input costs to prices
--Longer-term infla expectations well-anchored but not assured this will continue
--Higher than anticipated gas prices in Europe could add to upward pressure on Australia electricity prices
--Global supply chain issues easing; much less upside risk from this source
--Union officials long-term infla expectations remain around 3.5%, highest since 2009
--Short-term inflation expectations remain at relatively high levels
--MonPol Might Respond If Wages, Prices Respond of Persistent High Inflation
--Forecasts conditioned on cash rate rising to 3.5% by mid-2023
--Sees trimmed mean inflation at 3.2% in Dec 2024 from 3.0%
By Sophia Rodrigues
(Sydney, November 4, 2022)—The Reserve Bank of Australia raised its wages and inflation forecast and warned that interest rates might rise more than expected if persistent domestic inflationary pressures lead to a shift in inflation psychology.
In the quarterly Statement on Monetary Policy, published Friday, the RBA said that after initially being predominantly driven by supply shocks, inflation is now spreading to more persistent non-discretionary items.
“This follows an apparent increase in firms’ willingness to pass on upstream cost pressures to consumers,” the RBA said.
“The longer these domestic pressures persist, and inflation stays high, the more this could lead workers to make larger wage claims, especially in a tight labour market. This could in turn be reinforced by firms’ pricing decisions to pass on higher costs,” it added.
“If this were to occur, domestic demand would likely need to slow by more than currently forecast for inflation to return to target, with implications for the path of monetary policy.”
The tone of the document was largely hawkish with risks around high wages growth a central theme. It suggests that the board considered whether to raise the cash rate by 25bps or 50bps, before settling for 25bps.
“Drawing out policy adjustments (also) helps to keep public attention focused for a longer period on the Board’s resolve to return inflation to target,” the RBA said, repeating the comment it made in the minutes of the October board meeting.
The RBA said its forecasts for wages growth have accounted for some of the risk from change in behaviours from governments, businesses and households to cost-of-living pressures. Higher wages growth has also factored in the likelihood that the pass-through of temporarily high inflation to wages may be larger than when there is more labour market slack.
The RBA said composition of inflation in Australia is also expected to shift, with higher inflation expected in more persistent and non-discretionary items, such as rents, in coming years.
The RBA said information from the liaison program indicates that higher inflation outcomes are a factor in current wage negotiations, and this is likely to contribute to a pick-up in wages growth in the period ahead.
“If wage outcomes turn out stronger than expected and employers pass these and other increased costs on to consumers, it could result in inflation remaining elevated for longer than currently anticipated.”
The RBA also noted that higher expectations of future inflation could lead to a broadening of second-round price increases by firms, leading to higher actual inflation. Like the August SOMP, the RBA said retailers have indicated in liaison that they are now more willing to pass on input cost pressures to prices rather than accepting lower margins.
One interesting comment was on longer term measures of inflation expectations which the RBA said remains “well anchored, but it is not assured that this will continue.”
The RBA also noted that longer-term expectations of union officials remain around 3.5%, the highest level since 2009.