RBA's Bullock says there's evidence that remaining inflation is 'demand driven'

The news: Reserve Bank governor Michele Bullock says inflation will take some time to settle, and flagged a continuation of tough monetary policy amid evidence Australia's remaining inflation is demand driven. In a speech in Sydney on Wednesday night, Bullock said broad-based inflation, services price growth and high rates of capacity utilisation painted a picture of demand exceeding supply in the Australian economy.

The numbers: The RBA began lifting the cash rate in May last year to curb inflation, and boosted the rate by 25 basis points to 4.35% in November after a four month pause. Annual inflation has eased to 5.4% from a 7.8% peak in December 2022, but remains well above the RBA's 2%-3% target.

The context: Inflation can be driven by either supply-side issues or excessive demand. Post-pandemic supply chain issues and Russia's invasion of Ukraine contributed to sudden and severe spike food and fuel prices in 2022. But inflation had already been building in the aftermath of the COVID-19 pandemic, after central banks around the world rapidly expanded balance sheets to keep their economies afloat. The surge in inflation that followed has led to the fastest rate hiking cycle for scores of central banks globally, including the RBA and the US Federal Reserve.

What they said: "If inflation is simply the product of global supply disruptions or other price rises that monetary policy has little influence over then the appropriate response from interest rates would generally be limited," Bullock said.