The Reserve Bank of Australia is expected to raise interest rates next week as businesses pass higher costs on to customers, increasing concern about broader inflation pressures across the economy.
The prospect of further tightening was reinforced by comments from RBA governor Michele Bullock, who said monetary policy needed to limit so-called second-round price rises and keep inflation expectations anchored.
Speaking at a Committee for Economic Development of Australia event, Ms Bullock said the labour market remained “a bit tight”. She said unemployment would need to rise to between 4.5 per cent and 5 per cent to ease pressure on inflation.
Figures due from the Australian Bureau of Statistics on Thursday are expected to show the unemployment rate remained at 4.5 per cent in August. The final major data release before the RBA’s September 28-29 meeting is not expected to prevent a rate rise.
Businesses pass rising costs to customers
The challenge facing the central bank was illustrated by a local bookstore cafe announcing a price increase on social media, according to Besa Deda, chief economist at accounting group William Buck.
“The bookseller is facing the same dilemma confronting many businesses across the country,” Ms Deda said. “Costs have risen. Margins are under pressure. Businesses face a choice: they can absorb those higher costs or pass them on to customers. The bookstore cafe has chosen the latter.”
Oil price rises during the initial phase of the Iran war had already increased costs in industries such as construction and logistics, which rely heavily on diesel. The central bank was concerned about those costs feeding directly into prices, although there had been a possibility that inflation would prove temporary if oil prices later normalised.
Ms Deda said the bookstore was less directly exposed to oil prices, making price increases by booksellers, hairdressers and insurers a sign that the pressure was spreading beyond the sectors most immediately affected.
“Inflation becomes much harder to control when higher costs start showing up in the price of books, coffee, restaurant meals, haircuts, insurance premiums and countless other goods and services across the economy,” she said. “One business raises prices. Then another. Then another.”
Ms Bullock said the RBA would continue focusing on limiting those indirect effects, while the jobs figures would provide the final significant indication of labour market conditions before the board’s meeting.
