RBA's Kohler Warns Bringing Inflation Down Difficult

Reserve Bank of Australia policymaker Marion Kohler cautioned that returning inflation back to the target would be difficult and the road ahead could be bumpy.

“The next stage in bringing inflation back to target is likely to be more drawn out than the first,” Kohler, acting assistant governor of RBA, said at the UBS Australasia Conference in Sydney on Monday.

“This has been the experience of some other advanced economies that have been a little ahead of Australia in this inflation cycle,” the policymaker said.

The recent increase in fuel prices is also a timely reminder that upside surprises from supply shocks could affect headline inflation, Kohler said.

Earlier this month, the RBA had raised the cash rate target by 25 basis points to 4.35 percent as inflation is likely to be more persistent than estimated. The central bank has raised its key rates by 425 percentage points since May last year.

Although inflation has slowed from its peak of close to 8 percent in late 2022, inflation is still too high and underlying inflation is higher than expected a year ago, Kohler noted.

The RBA official observed that there are risks that high inflation could lead households and businesses to expect high inflation in the future, putting upward pressure on actual prices and wages.

If high inflation did become entrenched in their expectations, then it would be very costly to unwind, involving even higher interest rates and a larger rise in unemployment, Kohler said.

The central banker also said the RBA currently expects a further gradual easing in the labor market resulting from a period of below-trend growth in aggregate demand for goods and services.

Inflation is expected to continue to decline, but more gradually than anticipated three months ago, the policymaker added added.

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