When Besa Deda’s local bookstore cafe announced it would be lifting prices in a social media post, it neatly encapsulated the challenge facing the Reserve Bank.
“The bookseller is facing the same dilemma confronting many businesses across the country,” the chief economist at accounting group William Buck said.
“Costs have risen. Margins are under pressure. Businesses face a choice: they can absorb those higher costs or pass them on to customers. The bookstore cafe has chosen the latter.”
When oil prices spiked during the initial phase of the Iran war, costs increased in sectors like construction and logistics, which are heavily reliant on diesel as a part of their cost mix.
Evidence of direct price transmission concerned the central bank.
But as long as cost pressures did not broaden out to the wider economy, there was a chance inflation would only be transitory and would subside when oil prices normalised.
The bookseller is less directly exposed to oil prices.
When booksellers, hairdressers and insurers join in on the price rises, it is evidence of second-round effects showing up through the economy.
“Inflation becomes much harder to control when higher costs start showing up in the price of books, coffee, restaurant meals, haircuts, insurance premiums and countless other goods and services across the economy,” Mr Deda said.
“One business raises prices. Then another. Then another.
“One bookseller raising prices will not move the inflation needle. But when thousands of businesses across the economy are making similar decisions, it becomes exactly the sort of thing central banks worry about.”
Speaking at a Committee for Economic Development of Australia event on Tuesday, RBA governor Michele Bullock said the bank had to limit the extent of second-round price rises in the economy.
“Monetary policy really just needs to continue to focus on making sure that we limit indirect effects and we try to keep inflation expectations anchored,” she said.
Her comments further cemented market expectations that the RBA board would hike interest rates next week.
Labour force figures, set to be released by the Australian Bureau of Statistics on Thursday, are expected to show the unemployment rate held steady at 4.5 per cent in August.
The final major data release before the September 28-29 meeting, the jobs print would be unlikely to deter the RBA from hiking rates.
In that same fireside chat on Tuesday, Ms Bullock said the labour market was still “a bit tight” and an unemployment rate between 4.5 per cent and 5 per cent would be needed to ease pressure on inflation.
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