IMF Staff Country Reports

This Selected Issues paper analyzes inflation dynamics in Australia, with a special focus on wages. The paper finds inflation dynamics in Australia are similar to what is seen in most advanced economies in recent quarters, with inflation primarily driven by cyclically sensitive components. While external shocks following the Russian invasion of Ukraine and supply and shipping bottlenecks stemming from coronavirus disease 2019 played a significant role in the initial spike in inflation, a positive output gap amid a historically tight domestic labor market is likely to play an increasingly important role going forward. The Reserve Bank of Australia needs to remain vigilant, continuing to tighten policy to rebalance demand and supply, and ensuring that inflation expectations and wage pressures remain contained. Although wage growth has remain subdued, given robust evidence of the Phillips curve relationship in Australia, it is expected to pick up. Inflation is expected to remain above target through 2024, necessitating continued monetary policy tightening to rebalance demand and supply. Broad-based inflationary pressures are expected to gradually decline, with inflation reaching the inflation target band by the end of 2024, subject to some uncertainty.