From the RBA’s Bulletin today.
Liaison information suggests a continued moderation in prices growth over the coming year. The pace of that slowing is uncertain and the share of firms expecting above-average increases is still much higher than prior to the pandemic. Inflationary pressures remain generally broadly based across firms and industries, reflecting some domestic costs continuing to grow strongly.
Liaison provides some evidence that slower demand growth is playing a role in firms’ pricing decisions, helping to achieve a better balance between the level of demand and supply, which is needed to return inflation back towards the target range. If demand weakens quickly, the pace of moderation in prices growth could accelerate. In the 2023 pricing survey, firms suggested that while costs were the most important drivers of their price increases, a softening in demand was likely to be a more important factor in driving a slowing in prices growth in the following 12 months. Pricing surveys conducted by the liaison program between 2004 and 2010 found that firms typically increase prices in response to a rise in costs but decrease prices in response to a competitor’s price cut or a fall in demand (Park, Rayner and D’Arcy 2010).
Bonds rallied against the trend as rate cuts firmed into H2.
