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Inflation remains a challenge, Reserve Bank governor Michele Bullock says, and higher wage growth without better productivity could feed that problem.

“Inflation is the crucial challenge over the next one or two years,” she said, speaking on a panel at the ASIC annual forum this morning.

Inflation is currently 5.4 per cent, higher than the central bank’s target range of 2-3 per cent but below the December 2022 peak.

RBA governor Michele Bullock says inflation remains a crucial challenge.

Bullock said there seems to be a perception that inflation was being driven by supply pressures in areas such as petrol, rent and energy prices, but underlying demand was also an issue and that was what the RBA was working to address.

“It’s often said that if there’s just supply shocks, central banks should just let them run through … let them naturally decline and come out of the numbers, and we are observing a lot of that,” she said.

“But if there’s this underlying demand component to it as well, that is actually something that central banks can do something about and that and that’s been part of it.”

Bullock said that while wage growth of about 4 per cent in the context of productivity growth was not necessarily a problem when it comes to fighting inflation, but there were potential risks.

“If we don’t have any productivity growth, they’re on the high side, and they’re going to contribute to rises in costs,” the RBA governor said.

“And we know that unit labor costs over as measured in the last few years have been rising quite substantially … so that’s not helpful for the inflation [issue].”

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