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Early signs of second-round effects from soaring prices

The RBA expects headline inflation to drop back from 3.8% in Q2 to 1.5% by mid-2022. By contrast, we now only expect it to fall to 2.5% over this period, reflecting the pass-through from soaring coal, gas and food prices. We also expect the recent weakening of the Australian dollar and the surge in shipping costs to lift “core” goods inflation. The Bank may be able to ignore even a lengthy period of above-target inflation as long as wage growth remains subdued. Unfortunately, there are early signs that the surge in consumer prices will have second-round effects. Union officials’ inflation expectations have surged and if our inflation forecasts are correct, they are unlikely to fall back much. A push by union officials to offset rising living costs coupled with severe labour shortages provide fertile ground for wage hikes in upcoming enterprise bargaining agreements. Surging consumer prices also point to a stronger minimum wage hike next year. That matters because collective agreements and the minimum wage together determine the wages of around 60% of Australian workers. All told, we expect wage growth to reach 3% by the end of next year, stronger than the RBA’s forecast of 2.5%.

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