The latest CPI data has confirmed that price pressures are broadening across the economy. While rises in fuel, food and building commodities accounted for a significant proportion of the rise in headline inflation, accelerating wages growth (particularly in construction) and continued robust rises in rents outside of Sydney and Melbourne are signs that price pressures are building domestically. Together with the latest labour force survey, the data continues to indicate that the economy is operating close to full employment.

Given this, the emergency monetary policy settings are no longer required and the cash rate should be raised from its current level; and with the RBA appearing to agree, it’s likely that the RBA Board will begin policy tightening at its May or June meeting.

Moving through the rest of 2022, growth momentum should remain positive but is likely to slow. The easy wins from re-opening have been largely exhausted, and households are now being squeezed by higher costs of living (though the latest Federal budget will help offset some of this) and rising mortgage interest rates. Momentum in government spending and business investment is also likely to moderate, although spending in both categories is set to remain elevated compared to the recent past, and while the re-opening of the international border will allow international students and tourists to return it will also enable Australians to travel overseas (and so increase import leakages).

Against this backdrop, a steady but not necessarily aggressive pace of hikes should hopefully result in a soft landing for the economy, where inflationary pressures ease (helped by the sharp increases in commodity prices dropping out) but the labour market remains relatively tight – compared to other developed economies (most notably the US, where rates are set to rise very sharply), the RBA has more room to manage the slowdown in growth momentum.