Reserve Bank of Australia Deputy Governor Andrew Hauser assessed the inflation outlook as materially worse than projected in August during a fireside chat at Citi’s Australia & New Zealand Investment Conference in Sydney. Higher oil prices, demand associated with artificial intelligence and persistent domestic capacity pressures are complicating the November policy decision despite slowing activity and an easing labor market. Forecasts were still being finalized, and Hauser did not indicate a decision on interest rates. Oil prices were about one-third above the August forecast assumption, with potentially substantial further effects on consumer prices over the next two years. Artificial intelligence is adding demand through technology spending and data center construction, while market services inflation suggests domestic capacity pressures may be greater than previously assessed. Staff are reviewing their assessment of labor market capacity. Hauser also highlighted survey evidence that a growing share of businesses view inflation of 3% to 3.5% as the new normal, raising concerns about expectations becoming detached from the target. Quarterly inflation is likely to exceed the August forecast unless the final month brings a very large downside surprise. The policy trade-off is between further tightening to contain inflation and holding rates to limit damage to employment and activity. Consumption growth is subdued, housing is undergoing a correction and household confidence is weak, although business investment and overseas demand provide offsets. Hauser reiterated that the board’s unanimous September rate increase was accompanied by readiness to do more if needed. Monetary policy cannot reverse an external supply shock, but tightening may be necessary when persistent shocks threaten to generate broader price increases and higher inflation expectations.

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