Inflation is back. Should we be worried? - Grattan Institute

Prices have been flatlining for years, but now there is talk that inflation is back. How worried should we be?

There is little doubt we’ll see a spurt of inflation in the short term. The Reserve Bank of Australia (RBA) expects inflation to hit 3.25 per cent for the year to June. Inflation in the US rocketed back to 5.4 per cent in the year to June 2021.

However, a lot of that inflation will be temporary. Supply bottlenecks that emerged as the global economy opened up will ease in the coming months. In the depths of the pandemic panic last year, Australia’s Consumer Price Index actually fell by 1.9 per cent in the June quarter. A lot of inflation reported now simply reflects those past price falls.

Sustained inflation is really only a risk when rising prices get factored into firms’ and workers’ expectations, but inflation expectations remain subdued, so it’s hard to be worried.

It is hard to see inflation expectations rising after inflation has persistently undershot the RBA’s inflation target band of 2 per cent to 3 per cent a year for half a decade. Market economists – according to the RBA’s own survey – appear to agree. They expect inflation two years from now to be just 2 per cent. Union officials are more pessimistic.

After years where inflation has undershot, rising inflation would be among the best signs yet that Australia is exiting the economic funk it has endured for much of the past decade. Having missed its inflation target for much of the past decade, the RBA would probably agree.

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