Australians could be in for a wild ride, according to the Reserve Bank, with supply shocks expected to continue to shake the cost of living in years to come.
Reserve Bank chief Phil Lowe warned Australians of “more frequent supply shocks” as he spoke at the annual CEDA dinner in Sydney.
“Life is more complicated in a world of supply shocks; a negative supply shock increases inflation and reduces output and employment,” said Dr. Lion.
“Higher inflation requires higher interest rates, but lower production, and fewer jobs require lower interest rates.
“We’ll probably have to deal with this tension more often in the future.”
dr Lowe highlighted the impact of recent world events on historically high levels of inflation, with Australians expecting CPI to rise 8 per cent by the end of the year.
“The recent past has served as a powerful reminder of how influential the supply side can be, as the disruptions from Covid and Russia’s invasion of Ukraine have contributed to the highest inflation in decades,” he said.
Outside of the Covid-19 pandemic and the Russia-Ukraine conflict, Dr. Lowe highlighted other developments that could cause prices to become more volatile in the coming years.
He noted that the increasing frequency of extreme weather and climate events is a trend likely to continue as the number of major floods has doubled over the past 20 years.
“These climate events disrupt production and affect prices. We know this all too well in Australia, where the recent floods are one of the factors driving inflation at the moment,” he said.
“But not only food production is affected by extreme weather, but also the production of raw materials and the transport and logistics industry.
“These disruptions are affecting prices in global markets and it is likely that we will see more of these disruptions in the coming years.”
He also highlighted the possibility that energy prices could rise even more than they are currently as the world transitions to renewable energy.
dr Lowe argued that the existing stock of capital used to generate energy is “rapidly depreciating” as power plants are shut down and levels of sustainable investment are reduced.
“Forecasting is difficult here, but it is likely that the global capital stock used for energy generation will come under repeated pressure in the coming years,” he said.
“Then the transition to an energy supply based more on renewable energies would have to be expected with higher and more volatile energy prices.
dr Lowe argued that unlike Australia’s resource boom a decade ago, investors are not pushing into the energy sector in a way that would increase supply.
“By contrast, the investment response this time has been negligible and there is little evidence that companies are planning to increase supply in response to higher prices,” he said.
“The reasons for this are complex, but if supply doesn’t respond to higher prices, we’re likely to have more supply shortages in the future. And supply bottlenecks mean more variable prices.
dr Lowe went on to argue that the Australian economy needs to focus on becoming more productive to avoid the adverse effects of shocks.
“As a country, we must do everything we can to ensure that the supply side of our own economy is flexible,” he said.
“In a world of more frequent supply shocks, we will be better off if our labor and product markets are flexible so we can respond quickly and effectively.
according to dr Lowe, there are signs that high inflation is peaking and will gradually ease before returning to normal over the next few years.
“There is a reasonable basis for expecting inflation to fall next year and the year after that,”
“Our key expectation is to bet close to 3 percent by the end of 2024.”
Originally posted as RBA chief Philip Lowe, he warns variable costs could shock consumers