Australia's Inflation Forecast Looks Bleak Amid Capacity Pressures

Reserve Bank Governor Michele Bullock has issued a warning that inflation in Australia is unlikely to ease in the near future. Despite the RBA's efforts to drive back inflation through monetary policy, it remains above its target range.

Inflation peaked at 7.9% in 2022 and has remained high since, with both 'headline' and 'underlying measures' averaging around or slightly above 3.5% over the past 12 months. The RBA's cash rate has been raised by 50 basis points since February to combat inflation, but Bullock warns that capacity pressures in the economy and the conflict in the Middle East are contributing to elevated prices.

The conflict has increased oil prices, which have a direct impact on petrol costs and an indirect impact as businesses pass on input cost pressures. As a result, inflation is likely to remain high for some time, according to Bullock. The RBA's goal is to bring inflation back down to its target range.

ANZ economist Madeline Dunk described the recent inflation data as 'ugly,' triggering an immediate response from major banks and posing upside risks to the RBA's expectations.