The RBA’s Newest Inflation and Wage Projections Highlight Why Low-Interest Rates Hinder Australia From Exiting Its Economic Funk

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A significant concern is that workers may request higher wages, employers will then pass on this increase to consumers through prices, and a wage-price cycle could be set in motion.

Workers hoping for the Reserve Bank of Australia (RBA) to provide some financial relief will be disappointed by their latest economic report. The central bank is more relaxed in its mission to combat inflation and stabilise prices.

Tuesday’s decision to raise interest rates for the ninth consecutive meeting is evident in the RBA’s Quarterly Statement on Monetary Policy. It helps us understand why more increases are expected in the future.

The most impressive numbers were the projections for inflation. The trimmed mean gauge, which eliminates extreme movements, aligns with the RBA’s target 2 per cent to 3 per cent range over time. It is what everyone should be focusing on for long-term results.

The RBA’s December quarter reading of 6.9 per cent exceeded expectations and is likely to settle around 6.25 per cent by June and 4.25 per cent by the end of this year, as predicted by the bank itself.

For it to return down to 3 per cent, several cash rate hikes are expected over the coming twelve months – no matter what happens in between.

In 2023, higher inflation was predicted due to quicker-than-anticipated wage growth. For example, the wage price index escalated by 1 per cent quarterly and 3.1 per cent annually during the September quarter – surpassing all expectations!

Despite the record-breaking December quarter WPI, which is set to be released on February 22nd and predicted by the RBA to reach 4.25 per cent by 2023 and 3.75 per cent by mid-2025, real wages went down at an unprecedented rate of over 4 per cent, compared with consumer prices rising 7.3 per cent. It marked the quickest pace since 2012’s March quarter.

The near-term outlook is higher than a few months ago, reflecting the stronger-than-expected September quarter WPI outcome and ongoing strength in timely indicators of wages growth,” the RBA said.

To temper the unions’ complaints about real wages, the RBA hopes that boosting “broader measures of labour income growth” such as bonus payments, promotions, and overtime pay will provide some relief.

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