Australia Macro Service > Australia Research Briefings

Inflation take-off a tail end risk

Australia’s economy is continuing to build momentum, with output set to expand by 3% this year and the unemployment rate falling to 5%. Wage growth has also picked up a little, with pockets of tighter conditions emerging in some sectors. We expect these segments of labour market tightness to broaden, with the remaining spare capacity projected to be gradually absorbed as we move into the 2020s.

Historically, this process was associated with a marked acceleration in inflation. But in more recent times the link between economic performance, wage growth and core inflation appears to have weakened. While this can partly be explained by structural shifts in employment, the anchoring of inflation expectations and the increasingly transitory nature of price shocks has reduced the pass through from wage movements to prices. Given this, we do not expect to see a marked acceleration in inflation as the economy approaches potential output.

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