We aim for this – not because inflation is all we care about – but because the maintenance of low inflation is a necessary condition for having a long economic expansion in output and employment. Over the past two years, inflation in Australia has been restrained by the appreciation of the Australian dollar which took place between mid 2001 and the beginning of 2004.
However, there have been a number of influences which have pointed to a rise in inflation further ahead: •  the fact that after a long expansion we were encountering some capacity constraints;  •  the rising prices of oil and some other important industrial inputs; and  •  the fact that the downward influence on prices from the exchange rate appreciation would eventually fade away.