While the overall inflation rate has been “well behaved” overall, Australians were somewhat surprised by the December quarter inflation figures, Mr Blythe said, but a closer look reveals a deeper issue.
“Domestic inflation is running above three per cent and has been stuck above three per cent for about 10 years now,” he said, “but it has been concealed for a lot of that period by slower growth or even falls in import prices, which of course reflect the ups and downs of the Aussie dollar.
“The dollar has dropped a long way over the last year and we think it will drop further this year, to 84 cents by the end of 2014.”
Unless domestic inflation slows, the overall inflation rate will rise, Mr Blythe said.
“Everybody is estimating inflation to slow, but what that stickiness in domestic inflation is telling you is that we’ve actually got a structural inflation problem in Australia,” he said, before listing the primary causes.
“The aging population, which means spending on health, is going up, shifting education preferences driving up education costs at a fairly rapid rate, all levels of governments trying to raise revenues by increases in the tobacco tax for example, which feeds directly into the CPI.”
“It also reflects things like the spate of natural disasters we have had, which puts added pressure on insurance charges.”
Mr Blythe said the problem does have some upside risks to inflation this year and is one of the reasons why the Reserve Bank has ruled out any interest rate cuts.
However, we should plan for potential rate rises by the end of 2014, he said.
