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RBA upgrades core inflation forecast, explains recent errors

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The RBA has upgraded its core inflation forecast to peak at 6.5 per cent in December.

Trimmed mean inflation is forecast to move to 6.5 per cent around year end, up from 6.1 per cent at the end of September, before declining to 3.25 per cent by the end of 2024, the Reserve Bank of Australia (RBA) said in its latest quarterly statement on monetary policy.

In August, the RBA had cited slightly more timid figures, forecasting trimmed mean inflation to peak at 6 per cent and decline to 3 per cent by the end of 2024.

The bank explained that “second-round effects from higher energy prices” are forecast to keep underlying inflation a little higher than previously expected.

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“Domestic labour cost growth is expected to pick up over the coming year and remain high over the forecast period,” it said.

On Tuesday, the RBA announced that headline inflation is forecast to peak at 8 per cent, a little higher than a few months ago.

The bank explained its recent inflation forecast errors by noting that inflation is broadly based as a result of global factors, including pandemic-related disruptions to supply chains and Russia’s invasion of Ukraine.

Locally, it said, domestic demand, a tight labour market, flood-related disruptions and capacity constraints in some sectors are contributing to the upward pressure on prices.

“Expectations for above-average rainfall, consistent with the ongoing La Niña event, have also increased the likelihood of further supply disruptions affecting costs and prices for a range of goods in late 2022 and early 2023,” the RBA said.

Turning to energy prices, it said, they too are expected to add “significantly” to inflationary pressure over coming years.

“Retail prices for electricity and gas have increased by 10 to 15 per cent in recent months, but will mostly affect measured prices in the CPI in the December quarter,” the bank predicted.

“Information from government agencies suggests that price increases in 2023 are likely to be larger than previously assumed; wholesale prices remain around double the levels seen in 2021 and network costs are also expected to rise.

“As a result, retail gas and electricity prices are projected to rise by 20 to 30 per cent in 2023. Overall, these changes have resulted in inflation being higher than previously expected in the second half of the forecast period.”

Moreover, the bank said inflationary pressures have broadened significantly since late 2021.

“Faster rates of price inflation have spread beyond consumer durables and the prices of newly constructed homes to items such as groceries and market services,” the bank said.

The RBA lifted interest rates by 25 basis points at its November meeting having “recognised that interest rates had already been increased significantly in a short period of time and that the full effect of those increases lies ahead”.

“In an uncertain environment, slowing the adjustment of policy allows time to assess the effects of the increases to date and the evolving economic outlook.”

It reiterated that “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.

 

RBA upgrades core inflation forecast, explains recent errors

The RBA has upgraded its core inflation forecast to peak at 6.5 per cent in December.

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Maja Garaca Djurdjevic

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.

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