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Houston: we have an inflation expectations problem

Christopher Joye
10 May 2011

I've been writing about the risks and worrying developments associated with Australian inflation expectations longer than anyone. At first, some folks were a little dismissive of this. But I stuck to my guns. I was confident the RBA harboured similar anxieties.

Of course, it is now clear that the RBA is very concerned about both inflation and its single most important driver, expectations, judging by the airtime it is giving both.

In this chart from the RBA's latest Statement of Monetary Policy, you can see that both consumer and investor inflation expectations are trending up sharply. As the RBA rather honestly notes (honest in the sense that all central banks are inclined to spin when it suits their purposes), expectations of both consumers and investors are currently above the "inflation-targeting period average". This comes at the start of a highly inflationary investment boom:

“The Melbourne Institute’s measure of consumer inflation expectations, which rose sharply in January following the floods, has eased in the past couple of months to be a little above its inflation-targeting period average … Financial market indicators of longer-term inflation expectations have risen modestly over recent months, with the indexed bond measure also slightly above the average for the inflation-targeting period."

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