RBA Chief Economist Sarah Hunter warned that Australia faces rising risks of entrenched inflation as higher fuel prices begin feeding through supply chains and lifting inflation expectations. Speaking at a Bloomberg event today, Hunter said the danger extends beyond just energy, warning that firms may increasingly raise prices in anticipation of sustained cost pressures.
“Cost pass-through may be stronger than assumed,” she said, adding that higher fuel prices could “lift and embed higher inflation expectations… perpetuating the inflationary shock.”
Hunter stressed that the situation is especially challenging because the oil shock is hitting an economy where inflation was already elevated before the Middle East conflict erupted. Businesses were already expecting to adjust prices upward due to domestic cost pressures, meaning the latest surge in energy costs could spread more rapidly through the economy.
“This shock has come against a backdrop of elevated capacity constraints and domestic cost pressures,” Hunter said, warning that inflation pass-through would likely be “faster and more extensive” under current conditions.
Hunter also warned that persistent rises in expectations would make it much harder for the central bank to return inflation to target because policymakers would need to suppress both demand and expectations simultaneously. “Doing so may require a more substantial slowing of economic activity, as we saw during the early 1990s recession,” she said.
