Australia Inflation To Peak Around 8%, Says RBA

Australia’s inflation is set to peak at around 8 percent this year, driven by the pass-through cost pressures and higher food prices, the Reserve Bank of Australia said in its quarterly statement on monetary policy, released Friday.

Inflation is expected to peak at around 8 percent at the end of 2022, before starting to ease early next year, the bank noted. The rate was expected to peak at 7.75 percent in the August Statement.

The central bank said upward revision to the near-term peak reflects stronger-than-expected pass-through of upstream cost pressures, and estimates of the impact on food prices of the recent flooding in the eastern states.

Citing larger increases in electricity and gas prices, inflation outlook for the year ended December 2023 was upgraded to 4.75 percent from 4.25 percent. Likewise, inflation forecast for the year ended 2024 was lifted to 3.25 percent from 3.0 percent.

“The effect of high inflation and cost-of-living pressures on wage- and price-setting behaviour is a material risk to the inflation outlook,” the RBA said.

The outlook for underlying inflation was also a little higher than three months ago, and was projected to peak at 6.5 percent in late 2022. The RBA expects domestic labor cost growth to pick up over the coming year and remain high over the forecast period.

The RBA observed that factors affecting household spending were the key source of uncertainty for the domestic growth forecast.

The economy is forecast to grow 3.0 percent in the year ended December 2022, down from the previous outlook of 3.25 percent. The outlook for 2023 was trimmed to 1.5 percent from 1.75 percent. Similarly, the growth is seen at 1.5 percent versus the previous forecast of 1.75 percent.

Earlier this week, the RBA had lifted the cash rate target by 25 basis points to 2.85 percent, the highest since 2013. The bank also repeated its guidance that rates will be lifted further based on incoming data.

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