Independent economic forecaster and industry analyst, BIS Shrapnel, states in its Term Forecasts, February 2008 Update that inflation will remain above three per cent for the rest of 2008, through 2009 and into 2010.
The company says while the Reserve Bank of Australia’s (RBA) tightening of the cash rate should be sufficient to bring it back to three per cent by 2010, the days of low interest rates are over and the RBA will continue to struggle to control inflation for the next decade.
The company believes inflation will continue to be an issue and the RBA will be forced to increase interest rates to arrest growth.
“Aided by the world-wide credit squeeze, the RBA has been steadily tightening the noose on consumers in order to make room for an investment boom it can’t actually influence,” said BIS Shrapnel senior economist and chief forecaster, Richard Robinson.
Mr Robinson says monetary policy is being employed in an environment of strong demand, capacity constraints and labour shortages.
“The strength of employment and the boost from successive income tax cuts is making the Bank’s job harder, as these factors are helping to cushion household incomes. Demand won’t fall away, but given the indebtedness of the household sector it is inevitable that we will see consumer spending slow.”
Australia’s main inflationary concern remains the lack of slack in the labour market, which will be compounded by the ageing population he says.
“Investing in education is one way to alleviate the problem of skills shortages, but we have been slow to react to the shortfall and the benefits of current training initiatives won’t become apparent for some years,” said Robinson.
According to the company, measures to boost labour supply including increasing participation, encouraging people to delay retirement and immigration policies will provide an extra buffer, as will measures to enhance labour productivity.
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