RBA Governor Michele Bullock said the Bank can tolerate some of the direct inflation impact from supply shocks such as higher oil prices, but cannot ignore the risk that those pressures spread through the economy and become persistent. Speaking at a CEDA fireside chat on Tuesday, Bullock said monetary policy faces a more difficult trade-off when inflation originates from the supply side because higher rates cannot directly create more energy or productive capacity. “We have to be mindful that there will be first-round effects,” she said. The bigger concern is whether repeated shocks become embedded in household and business expectations and ultimately turn “self-fulfilling.”
That puts the focus on second-round and indirect effects rather than the initial jump in fuel or other imported costs. Bullock said the RBA needs to ensure policy is set in a way that “minimises the second round and indirect effects which might perpetuate ongoing inflation.” The challenge is more acute because Australia is already operating with excess demand, while the AI investment boom is adding further demand before any productivity-driven improvement in supply arrives. Bullock described this as an “awkward sequencing event,” with AI currently boosting spending and capacity requirements ahead of the potential longer-term supply benefits.
The message reinforces why the RBA cannot automatically look through another oil-driven inflation shock even if the initial price increase is externally generated. Bullock did not pre-commit to a particular rate decision, but her framework is clear: first-round supply inflation can be tolerated to some extent; persistent pass-through cannot. With repeated geopolitical, trade and energy disruptions increasing the risk that inflation expectations become entrenched, the policy question is whether current restraint is sufficient to prevent temporary cost shocks from developing into broader and more durable inflation.
Key Takeaways
- RBA Governor Michele Bullock said the Bank can tolerate some first-round inflation from supply shocks such as higher oil, because monetary policy cannot directly fix the supply problem itself.
- The bigger risk is that repeated shocks become embedded in household and business expectations and turn “self-fulfilling.”
- Bullock said policy must be set to “minimise the second round and indirect effects which might perpetuate ongoing inflation.”
- Australia’s starting point makes that task harder because the economy is still operating with excess demand.
- Bullock also highlighted an “awkward sequencing event” from AI: investment is adding to demand now, while the potential productivity and supply benefits may arrive later.
- The policy implication is conditional rather than mechanical: higher oil alone does not automatically require a hike, but broader pass-through and persistent inflation would strengthen the case for tighter policy.
