Cheap electricity and strong labour supply have kept Australian inflation lower than in other countries, the governor of the Reserve Bank declared on Tuesday.
Addressing a group of business economists in an online webinar, Philip Lowe said price pressures in Australia were lower than in countries such as the US and the UK, with underlying inflation of 2.1 per cent in the year to the September quarter.
The divergence adds weight to arguments that rapid price increases in some economies were due to supply disruptions from the Covid-19 pandemic, rather than a global shift towards high inflation.
“There was a perfect storm of sorts: very strong demand for goods combined with a hit to productive capacity. The result was a sharp increase in shipping costs around the world, a fall in inventories, increased delivery times and large rises in the prices of many goods,” Lowe said.
Unlike the US and the UK, where lockdowns and school closures had led to a big drop in labour supply, Australia’s JobKeeper programme had maintained the link between businesses and employees, Lowe said. Higher labour supply is helping to keep wages in Australia down.
Labour force participation rose to a record high in Australia after the economy began to recover from Covid-19 lockdowns. Participation fell after the Delta variant of the virus hit the economy but the RBA thinks it will rise again to record levels.
The wage-setting process in Australia includes multiyear agreements. That means they have a degree of inertia, said Lowe. The RBA expects wage growth to pick up but only gradually.
“Our business liaison suggests that most businesses retain a strong cost control mindset and are seeking to use measures other than raising base wages to attract and retain staff,” said Lowe.
A second factor limiting inflation in Australia is energy prices, he said, with prices trending down in recent years, partly due to increased capacity from wind and solar generation.
Electricity prices in other advanced economies have surged as their power systems struggle to meet demand — one reason for the rise in global inflation.
Other dynamics pushing up inflation, such as higher oil prices, rising construction costs and shifts in consumption patterns towards durable goods, were similar in Australia to other countries.
Data and forecasts suggested there would be no need to raise interest rates from 0.1 per cent during 2022, said Lowe, with lower inflation giving the RBA more leeway than other central banks.
Australia has little historical experience of how the labour market works at an unemployment rate of 4 per cent, Lowe said, and there was uncertainty about how the reopening of international borders would affect the labour supply.
“It is therefore possible that faster-than-expected progress continues to be made towards achieving the inflation target. If so, there would be a case to lift the cash rate before 2024,” he said.
Lowe was speaking two weeks after the RBA abandoned its policy of yield curve control and allowed three-year bond yields to rise above 0.1 per cent.