The September quarter inflation data highlighted both global inflationary pressures (from commodity prices and supply/demand imbalances in goods markets) and the two speed recovery of the domestic economy, with NSW and Victoria lagging behind the rest of the country. With the RBA unable to influence global price moves (and much of these shifts likely to be transitory in inflation terms, as constraints ease and price momentum moderates), the speed of recovery in the largest two states (and further gains elsewhere) will dictate when monetary policy needs to tighten.

The high frequency data suggests that the recovery in the east coast states will be robust, but it is still likely to be mid-2022 before all restrictions (particularly the international border) are fully eased – this will be vital for NSW and Victoria, who are most reliant on services exports. In line with this, moving through H2 2022 and into 2023 the labour market should tighten further, to underpin a pick-up in wages growth, domestic price inflation and ultimately the beginning of a tightening cycle.