As the cost of living in Australia worsens with each passing day, one of the nation’s top leaders has warned of the reality of what lies ahead.
Federal Treasurer Jim Chalmers has warned that inflation is “the defining challenge” for Australia, after Reserve Bank Governor Philip Lowe predicted it will reach 7% this year.
In a speech to the American Chamber of Commerce in Australia on Tuesday morning, the head of the RBA said that the board expected a peak in inflation of 6 percent in 2022, but the forecast was higher than in early May, when gasoline prices began to jump to heaven.
The RBA is now preparing for a peak of 7% in the December quarter – above the current rate of 5.1%.
And while he said he expects it to decline by early next year, it will take “several years” before inflation returns to normal.
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“I think it will be several years before inflation returns to the 2-3 percent range. It will gradually decline over the next few years, “he said.
“That’s why it’s important that we draw a path there and that people have confidence that we will.”
He said inflation should start to decline in the coming months due to three main factors – reducing supply chain disruptions caused by the pandemic, tightening monetary policy and because some high prices are likely to fall back.
Speaking afterwards, Mr. Chalmers thanked Dr. Lowe for his “candor and his candor.”
“Overall, the expectation is that inflation will worsen before it improves, and that interest rates will also rise,” Mr Chalmers said.
“This is already making life very difficult for Australians and Australian industry as the prices of goods, services and supplies go through the roof.
“We have a lot of work to do in this country and in our economy, but we cannot just pretend that we are not facing these great challenges that we are facing in the next six or twelve months in particular.
“It is possible to be optimistic about the future of our economy and the future of our country, while recognizing that we have to deal together in a really difficult, really difficult combination of circumstances.
“What is needed here is a little patience, a certain perseverance, a lot of cooperation and teamwork.”
Dr Lowe added that inflation was increasingly coming from Australia rather than global factors, but promised to do what was “necessary” to stop it from growing too far.
“After a strong recovery from the pandemic, domestic spending growth is now testing the economy’s ability to meet demand for goods and services,” Dr Lowe said.
“This is particularly evident in the labor market, with many companies reporting that the availability of labor is a significant constraint on their ability to work and / or expand.
“High inflation damages the economy, reduces the purchasing power of people’s incomes and devalues people’s savings. It is also regressive, hurting most of those who are least prepared to defend themselves.
Mr Chalmers reiterated the RBA’s forecast for a recession, saying: “We are not working on expectations at this point for this risk to arise or arise.
“We have reason to be cautiously optimistic about the future of our economy, but we must first focus on the difficulties that lie ahead.
Prepare for more interest rates
Dr. Lowe also confirmed that more interest rate increases are certain.
“As we chart our way back to 2 to 3 percent inflation, Australians need to be prepared for more interest rate hikes,” he said.
“We have decided to make a larger adjustment of 50 basis points based on the additional information, which implies a further upward revision of the already high inflation forecast.
“The Council also took into account the fact that interest rates are still very low.
“However, I want to emphasize that we are not on a pre-determined path. How fast we raise interest rates and how far we have to go will be guided by input and on-board assessments of inflation and labor market prospects.
However, he said he did not believe the recession was on the horizon for Australia, given that “the foundations are still quite positive”.
RBA’s “reputation damage”
Dr Lowe also acknowledged that the RBA had suffered a “reputation damage” when it tried to cancel its Covid-19 incentive program.
In his speech, he acknowledged that the revision of the RBA’s policy of fixing interest rates at 0.1% for up to three years during the pandemic caused a “messy” end to the program in late 2021, which “caused some damage to a bank’s reputation ”.
Meanwhile, Australians are nervously awaiting the RBA’s next interest rate decision on July 5, when the board is expected to vote on another “super-big” interest rate increase of 50 basis points, which will bring the official interest rate to 1.35 percent.
This comes after an increase of 25 basis points in May and a jump of 50 basis points earlier this month, with the exchange rate now at 0.85%.