Three key issues for the Australia inflation outlook

The Q2 CPI data prompted a sharp re-evaluation of the outlook for inflation and interest rates across financial markets. We have also revised our forecasts higher, albeit more modestly, based on our views on three key issues for inflation at present.
The main themes in this report:

• Supply chain pressures – these have not been as acute as in other advanced economies, and there are signs that bottlenecks are being worked through. And while it looks as though these pressures will be transitory rather than persistent, there are still upside risks in the coming quarters.
• Housing construction costs – Federal and state government grants have largely insulated the CPI from sharp cost inflation driven by higher demand and supply constraints. But with the flow of grant payments easing, risks to both headline and underlying inflation from this component are tilted to the upside over the next year.
• Wage pressures – The Q3 wage data were relatively benign but did illustrate the sectors of the economy that are likely to lead wage growth as the labour market tightens in 2022. Public sector pay increases will become less of a headwind over the coming year, but the pace of improvement in the private sector is central to the inflation profile.