Covid-19 shock responsible for global inflation, says Australian central bank

Cheap electricity and strong labour supply have kept Australian inflation lower than in other countries, the governor of the Reserve Bank supposed on Tuesday.

Addressing a group of merchantry 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 upper 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 financing virtually the world, a fall in inventories, increased wordage 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 waif in labour supply, Australia’s JobKeeper programme had maintained the link between businesses and employees, Lowe said. Higher labour supply is helping to pension wages in Australia down.

Labour gravity participation rose to a record upper in Australia without the economy began to recover from Covid-19 lockdowns. Participation fell without the Delta variant of the virus hit the economy but the RBA thinks it will rise then to record levels.

The wage-setting process in Australia includes multiyear agreements. That ways they have a stratum of inertia, said Lowe. The RBA expects wage growth to pick up but only gradually.

“Our merchantry liaison suggests that most businesses retain a strong forfeit tenancy mindset and are seeking to use measures other than raising wiring wages to vamp and retain staff,” said Lowe.

A second factor limiting inflation in Australia is energy prices, he said, with prices trending lanugo in recent years, partly due to increased topics from wind and solar generation.

Electricity prices in other wide 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 financing 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 increasingly leeway than other inside banks.

Australia has little historical wits of how the labour market works at an unemployment rate of 4 per cent, Lowe said, and there was uncertainty well-nigh how the reopening of international confines would stupefy 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 specimen to lift the mazuma rate surpassing 2024,” he said.

Lowe was speaking two weeks without the RBA abandoned its policy of yield lines control and unliable three-year yoke yields to rise whilom 0.1 per cent.

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