Bringing inflation down in Australia could be a long process: RBA official warns

As a financially tight Christmas season looms for millions of households, Reserve Bank acting assistant governor Marion Kohler said that although the recent slowdown in the cost of goods would continue, there was no sign that strong growth in service prices would ease.

Ms Kohler said the rising cost of market services, which account for around a fifth of the consumer price index tracked by the Australian Bureau of Statistics, was being driven by strong demand, mounting business expenses such as energy, rent and insurance, and increasingly expensive labour.

"Inflation is still too high and underlying inflation is higher than expected a year ago," she said.

"This reflects strong domestic cost pressures and a still-robust level of aggregate demand."

The RBA official cautioned that, "the next stage in bringing inflation back to target is likely to be more drawn out than the first. The road ahead could be bumpy".

Ms Kohler's remarks underlined concerns that interest rates could go higher.

While a December rate hike is currently considered unlikely, unexpected events like the national port shutdown caused by a cyber attack on operator DP World and last week's Optus outage have markets on edge.

The Reserve Bank upgraded its inflation forecasts on Friday, and expects price pressures to stay higher for longer. It predicts the annual CPI to slow to 3.5 per cent by the end of next year (compared with its earlier estimate of 3.3 per cent) but still expects it to drop to within its 2 to 3 per cent target band by the end of 2025.

Part of the reason for a slower than expected inflation slowdown has been resilient demand, supported by the big influx of migrants and strong public and private investment, include a large pipeline of public infrastructure works," Ms Kohler said.

"We expect inflation to continue to decline, but more gradually than anticipated three months ago."

According to The Economist, Australia's inflation problem is particularly concerning because of rapidly rising labour costs and the broad spread of price pressures across the economy.

The publication said unit labour costs - how much employers pay workers for a given unit of output - grew 7.1 per cent in the past year, which was the fastest rate out of sample of 10 rich countries is examined.

The fast pace of such costs reflects poorly on the nation's productivity performance, which has sagged for most of the past decade.

Weak productivity is particularly significant in the context of rising wages. Pay packets are growing by a average 4 per cent in the private sector but firms have told the RBA they pace of growth is slowing.

Ms Kohler said the central bank's forecasts for inflation are based on the assumption that productivity growth strengthens to around the pre-pandemic trend.

As the economy slows over the coming year, the jobless rate is expected to increase and reach 4.3 per cent by mid-2025.

But the RBA official said increasingly employers were adjusting to weakening demand by cutting back on work hours rather than sacking staff altogether, and this trend was likely to continue.

Ms Kohler said there had been a long-term trend to greater levels of part-time employment and "a related shift in the way the labour market adjusts to changes in...demand. A greater share of the adjustment tends to happen through changes in hours worked, rather than headcount".

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The trend away from full-time work is highlighted by Australian Bureau of Statistics data showing that almost one in four employees - 2.7 million workers - are casuals, including 25.5 per cent of women in the workforce.

Workers on such arrangements typically has no paid leave entitlements, had work hours and pay packets that varied weekly and were not guaranteed minimum work hours.

The ABS also found that 1 per cent of all workers were employed in the gig economy, most of them provide ride share and food delivery services.

The majority of such workers were men, had been doing it for less than a year and did not depend on it as their main source of income.