The second source of uncertainty is domestic in nature – and that is how inflation expectations and the inflation psychology in Australia adjust to the period of high inflation. If workers and businesses come to expect higher inflation, and wages growth and price-setting behaviour adjusts accordingly, the task of navigating that narrow path will be very difficult, if not impossible.
A shift higher in inflation expectations will require higher interest rates. In time that would mean a sharper slowing of the economy. It is in our national interest that we avoid this. The third source of uncertainty is how households respond to higher interest rates. Interest rates are increasing for the first time in 12 years and they are rising quickly.