RBA Governor Michele Bullock, in a speech, emphasized the changing nature of the inflation challenge facing Australia, noting its increasing shift towards being “homegrown and demand driven.” This distinction is crucial as it significantly influences the central bank’s policy response.
Bullock differentiated between inflation driven by global supply disruptions, over which monetary policy has limited influence, and inflation stemming from domestic demand exceeding the economy’s potential. In the case of the latter, she argues, “a more substantial monetary policy tightening is the right response.”
The Governor also highlighted three key indicators supporting the demand-driven nature of current inflation: Firstly, the broad-based nature of inflation across various sectors; secondly, the underpinning of inflation by domestic demand, particularly in services; and thirdly, the continued limited spare capacity in the economy, as evident in high rates of labor utilization.
Regarding the timeframe for bringing inflation back to the target range, Bullock suggested that while supply-side issues eased relatively quickly, reducing inflation from 8% to 5.5% within three quarters, the demand-driven component would take longer to address. She projected that it might take another two years for inflation to fall below 3%.
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