Treasurer Jim Chalmers warns that prices will “go up” while Reserve Bank governor says inflation will rise

As Australia’s cost of living nightmare worsens every day, one of the country’s top leaders has warned of the reality of what is to come.

Federal Treasurer Jim Chalmers has warned that inflation is Australia’s “ultimate challenge” after Reserve Bank Governor Philip Lowe predicted it would reach 7% this year.

In a speech at the U.S. Chamber of Commerce in Australia on Tuesday morning, the RBA chief said the board expected a 6% inflation peak in 2022, but that the forecast had risen even further. since early May, when gasoline prices began. shoot yourself.

Now, the RBA is gearing up for a high of 7 percent in the December quarter, more than the current rate of 5.1 percent.

And while he said he expected it to decline early next year, it would take a “couple of years” for inflation to return to normal.

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“I think it will be a few years before inflation returns to the 2-3% range. Over the next two years, it will gradually go down,” he said.

“That’s why it’s important that we chart that path there and people are confident that we will.”

He said inflation is expected to begin to decline in the coming months due to three main factors: a reduction in supply chain disruptions caused by the pandemic, a tightening of monetary policy and the fact that some high prices are likely to return. to go down.

Speaking later, Mr. Chalmers thanked Dr. Lowe for his “candesa and frankness.”

“The general expectation is that inflation will get worse before it gets better, and that interest rates will also rise,” Chalmers said.

“This is making life very difficult for Australians and Australian industry as the prices of goods and services and supplies go through the roof.

“We have a lot to do in this country and in our economy, but we can’t just try to eliminate these big challenges that we face in the next six or twelve months in particular.

“It is possible to be optimistic about the future of our economy and the future of our country, while acknowledging that we have to navigate together through a really complicated and very difficult combination of circumstances.

“What is needed here is a little patience, a little persistence, a lot of collaboration and working together.”

Dr Lowe added that inflation was increasingly coming from within Australia and not as a result of global factors, but pledged to do “whatever it takes” to prevent it from rising too high.

“Following the strong recovery from the pandemic, the growth of domestic spending is testing the ability of the economy to meet the demand for goods and services,” Lowe said.

“This is particularly evident in the labor market, with many companies reporting that the availability of labor is a major constraint on their ability to operate and / or expand.

“High inflation harms the economy, reduces people’s purchasing power and devalues ​​people’s savings. It is also regressive, harming most of those who are less equipped to protect themselves. “

Mr. Chalmers echoed the RBA’s prediction of a recession, saying: “We are not working on the expectation at this time that this risk is occurring or is occurring.

“We have reason to be cautiously optimistic about the future of our economy, but we must first navigate the challenges we face.”

Get ready for more interest rate pain

Dr. Lowe also confirmed that more interest rate hikes were a certainty.

“As we pave the way for 2 to 3 per cent inflation, Australians should be prepared for further interest rate hikes,” he said.

“We decided to make an adjustment of more than 50 basis points on the basis of additional information that suggests a further upward revision of an already high inflation forecast.

“The council also took into account the fact that the level of interest rates was still very low.

“I would like to emphasize, however, that we are not on a pre-established path. and the labor market. “

However, he said he did not believe there was a recession on the horizon for Australia, given that “the fundamentals are still quite positive”.

RBA’s “damage to reputation.”

Dr. Lowe also admitted that the RBA suffered “reputation damage” when it tried to recover its Covid-19 stimulus program.

During his speech, he admitted that a review of the RBA’s policy of setting interest rates at 0.1 percent for three years during the pandemic had led to a “messy” end to the program in late 2021 that it had “caused some damage to the bank’s reputation”.

Meanwhile, Australians are anxiously awaiting the RBA’s forthcoming interest rate decision on July 5, when the board is expected to vote another 50-point “big” rate hike, which would bring the official rate cash up to 1.35 percent. .

It comes after a 25 basis point increase in May and a 50 basis point jump earlier this month, with the cash rate now at 0.85 percent.

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