Breaking a decades-rare inflation outbreak

After decades in which high inflation was largely absent from Australia's charts, headline CPI reached 7.8% in the December quarter of 2022, its highest rate since 1990. In a September 2022 speech, Governor Philip Lowe traced the surge to compounding forces: petrol prices alone rose 32% over the year, adding about 1.2 percentage points to inflation, while a construction boom pushed building costs up around 20% and added roughly 2 percentage points on its own, on top of global energy-price shocks that the European Central Bank estimated explained three-quarters of its own region's inflation surprise. Lowe also pointed to a shift in pricing psychology: businesses could now announce price increases and expect what he called 'begrudging acceptance' from customers, turning high inflation itself into a coordinating mechanism for further price-setting. The Reserve Bank responded with its fastest tightening cycle in decades, lifting the cash rate by 2.25 percentage points between May and September 2022 alone and continuing to around 3.35% by early 2023, with Lowe describing the task of taming inflation without triggering a recession as a deliberately narrow path.