Summary:
- Hauser flags stagflation risk as central bank “nightmare”
- Inflation still too high in Australia
- Supply capacity described as constrained
- Energy prices seen as major income shock
- Focus on preventing rise in inflation expectations
RBA Deputy Governor Andrew Hauser warned that Australia is facing a difficult macroeconomic backdrop, with elevated inflation and constrained supply capacity raising the risk of a stagflation-style scenario if energy shocks persist.
Speaking in a fireside chat, Hauser described the central bank’s “nightmare” outcome as one where inflation rises while economic activity weakens, a combination that would complicate policy decisions. He emphasised that inflation in Australia remains too high and that underlying supply constraints continue to limit the economy’s ability to absorb shocks.
A key concern is the surge in energy prices linked to the Middle East conflict, which Hauser characterised as a significant income shock for Australia. Higher energy costs are eroding household purchasing power and increasing input costs for businesses, raising questions about how strongly activity may slow in response.
At the same time, the RBA is focused on preventing any lift in medium-term inflation expectations, which could entrench price pressures and make inflation more persistent. Hauser’s comments reinforce the bank’s concern that second-round effects, where higher costs feed into wages and broader pricing behaviour, remain a key risk.
The combination of constrained supply and elevated inflation leaves the RBA in a challenging position. While rising energy prices are likely to weigh on growth, they also risk keeping inflation higher for longer, limiting the scope for policy easing.
Hauser’s remarks align with the broader RBA narrative that inflation remains above target and that policy must stay sufficiently restrictive to ensure expectations remain anchored, even as downside risks to activity begin to build.
