Speakers: Michele Bullock

Transcript

Michele Bullock

Developments since then suggest that although growth in the Australian economy is slowing as expected, some of the international and domestic upside risks to inflation have materialized or are materializing. Inflation will therefore likely be higher than was our base case in August. The conflict in the Middle East has re-escalated, and global energy prices are now much higher than had been assumed in the August forecasts. Oil and related prices have increased sharply again and will add materially to inflation, both directly and indirectly, as businesses facing increasing pressures from higher transport and related costs attempt to pass them on. At the same time, short-term inflation expectations are elevated. Other global cost pressures have increased. In addition to the energy price shock, the AI boom and extreme weather events are contributing to upward pressure on a range of agriculture, agricultural and technology related prices. The global AI boom is also driving stronger growth in economies that are key parts of the AI supply chain. In turn, that is driving high global prices for some AI-related technologies that are supply constrained. While they are certainly compounding the inflation problem, we still see inflation arising from domestic capacity pressures. Despite the unemployment rate recently rising a little more than we had expected, the labour market still seems a little tighter than we previously judged. The evidence for this is elevated underlying inflationary pressures. That is, when we exclude some of the large volatile price movements, such as fuel, we see inflationary pressures in areas that reflect domestic demand for goods and services. And continued weak productivity growth means the economy cannot grow strongly without putting pressure on inflation. This is a fundamental challenge for the Australian economy and for everyone's real spending power over the next few years. Against this backdrop and despite a growth in domestic demand slowing, a further period of subdued growth of aggregate demand is needed to reduce capacity pressures and bring inflation down sustainably.