Senate Economics Legislation Committee, , 3:00:14 to 3:08:26
A comparison of Australia's inflation target and current rate against international peers, focusing on the role of domestic excess demand and productivity.
Topics: Trade policy, Government spending
Speakers: Michele Bullock, Hon Jane Hume, Dr Sarah Hunter, Senator Lisa Darmanin
No, I understand that. You've also said that it's both domestic and international factors that are pushing inflation above target band. Do you accept though that our inflation rate is above almost every other major advanced economies? So therefore domestic factors must be what is mainly at play.
Um so um you've got to be careful here because our inflation target is higher than other countries. Other countries' inflation target uh 2% mostly, ours is two and a half, and if you look at how far above target we are relative to our uh and other countries, we're not we're not much different than others. It's true our inflation rate is high, but our target is higher. Having said that, I don't think you can draw that conclusion at all. I think the problem for us is that we started from a position of excess demand. Other countries did not. Other countries started many. Uh I'm thinking particularly of uh countries like Canada and New Zealand. They started from positions of excess supply and high unemployment rates. So we already had a bit of an inflation issue already, and then this has added to it. So I don't think you can sort of divide it up into specific amounts due to um demand, uh excess demand and uh supply shocks, but I think what you can say is that because we started from a position of excess demand, it has made our issue more complicated.
That sounds to me like we weren't then prepared for the international headwinds that came our way. Our domestic situation was the problem, and obviously government spending, as you have pointed out, is part of that. That was already the problem.
We we already had a situation where, and this is why we started raising interest rates before the conflict in the Middle East, you might recall.
Yes.
Inflation had been rising through the back half of 2025, and we responded in February by starting to raise interest rates. So we had already recognised that we had an excess demand problem, and there are two issues there. One is that um demand probably didn't slow quite as much as we thought it would be. In fact, it picked up a bit in the second half of that year, and that was uh private sector as well. And then the second point is that um it seems that the supply capacity of the economy is not quite as good as we thought it was. In other words, productivity was not uh picking up as we thought it might.
It's uh got to the stage now where we hang on every word of this statement of monetary policy. Back in 2023, uh that statement of monetary policy looked at demand, sorry, supply and demand drivers of inflation in Australia, and in that analysis, you disaggregated the impact of domestic and international factors. Um you said there in that statement that inflation has increased substantially over the past year. Because monetary policy primarily affects the economy by influencing demand, it's important to understand how much of the increase in inflation reflects supply side factors versus demand side factors in order to determine how policy should respond. I'd like to know if this modelling has been updated, considering that inflation has again increased substantially in the last year.
Um I'll pass to Sarah. I just want to make the point that yes, it's but it's an uncertain process. Um we can do our best at that. Um, but sometimes um what you think at the time is not what turns out in so you think it was domestic, and it turns out it was actually international and vice versa. So we do our best to do that. But Sarah, did you want to make a few comments on this?
I'm gonna have to do that. Yeah, so we might raise a bit further on what the government uh the governor's just said. Um we do um that type of analysis that you're talking about, Senator, on an ongoing basis. So you'll actually find that type of discussion in every single statement of monetary policy. Uh, you'll find our assessment of the sort of current position, if you like, as it was at the time of publication in the economic conditions chapter, and you'll find our assessment of how we think uh that balance of supply is going to evolve going forward in the outlook chapter. And within both of those uh uh sections of the document, uh we also where it's appropriate talk about the balance between international factors and domestic factors. So to give you an example, over the last uh six to nine months, as you can well imagine, we spent a lot of time talking about what's happening overseas, particularly with respect to oil uh refined fuel product markets and how that's flowing into uh the economy here and what role that's playing in terms of inflation. So uh that kind of analysis you're talking about happens on an ongoing basis.
Okay, so back in 2023, obviously you quantified it, it wasn't just a discussion. I'm wondering whether you can provide us with the same chart from that 2023 statement, but updated.
That was the bolt in 2023.
So, yeah, yeah, sorry, I I wasn't actually, so I wasn't at the bank in 2023, so I'm actually not aware of precisely which statement you're talking about of the four that were released that year, uh, which also means I'm not I don't have in front of me the box uh the chart that you're talking about. We can certainly take it on notice to have a look to see if we have um got a more recent update, so the governor's just showing it to me. Thank you, we can we can certainly we've we've done various different versions of that type of analysis over the last couple of years. We've actually published some of that analysis uh through other formats, uh, bulletin articles and such, but we can take it on notice as to whether we can uh whether we have the least version of that chart for you.
Thank you. And my very very final thing is you said when I mentioned the updated CPI figures to you that they were broadly in line with expectations, um, without obviously uh giving away deliberations of the board. If these headline figures are in line with expectations, if the core inflation data is in line with those expectations, um, what would that say about the need for the reserve bank to respond with further tightening?
Um it might be as well for me to clarify what uh my colleagues said about in line with expectations, perhaps before the governor responds to that particular question. Uh so the data was in line uh broadly speaking with what we thought, having seen the July and August monthly CPI data, uh the data is uh stronger than we were anticipating in our August SMP. So if you look at the latest forecasts that we've published, which were published in August, and you can see the charts in there, the numbers that we got today were stronger than we were anticipating uh yeah, around about three months ago. Uh, but have given what we've seen in the data since then, we were anticipating that. Um so I just wanted to clarify that uh so that everyone's clear on what we're meant.
Um and in answer to your question, Senator, um I can't give you any guidance on what this might mean for the government for the uh for the board. Um board obviously meets next Monday, Tuesday. We are in the process internally here of finalising uh papers for the board, which will go to these issues. Um I would only point you to some of the statements we made last time about the risk, upside risks we saw to inflation and whether they were materializing or not. Um this is consistent with what we thought um taking into account recent information, the inflation numbers might look like, um, and the board will obviously be considering that and the prospects for inflation to be coming down and how tight they think uh policy is before making decision on Tuesday.
Thank you, Governor. Thank you. Senator McKim.