Timbrell said tightening in the labour market would drive wages growth and be the major factor in getting inflation back into the RBA’s target band.
“That's going to happen even as the opening of the borders boosts the supply of labour,” she said. “The opening of the international borders is not necessarily going to have too much of a negative impact on wages.”
Timbrell said the RBA’s July meeting will include an announcement on the fate of both the central bank’s yield target and quantitative easing.
“We don't think the yield target will roll over” to the November 2024 bond, she said. “And without pre-empting the board's decision, we think flexible QE is the most likely approach.”
Timbrell said strong inflationary pressures in the US, where the economy is “reopening in full swing”, would add to questions around the Federal Reserve’s monetary policy ‘tapering’ plan.
“With employment yet to fully recover and the narrative of transitory inflation still in play, the Fed will be unlikely to shift its rhetoric much,” she said. “However, the transitory nature of inflation… does have some question marks on it.”
Services prices represent about 60 per cent of CPI in the US, Timbrell noted, and are running at a three-month annualised pace of 5.2 per cent, “suggesting inflation creep may be broadening”, she said.
“That's going to be a challenge for the Fed to see how long it can hold the line that inflation is transitory, especially if evidence continues to build that wage prices are rising.”
Timbrell also touched on the impact of elevated commodity prices in China. Listen to the podcast above to find out more.