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CBA: The case for and against higher consumer inflation in 2021


MacroBusiness
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By Gareth Aird, head of Australian economics at CBA:
Key Points:
With weak wages growth set to persist and some further appreciation of the Australian dollar expected, the outlook points to low inflation continuing over 2021.
But our expectations for a strong consumer-led economic recovery means some demand-pull inflation is likely and the risk of underlying inflation pushing through2%/yr over 2021 is non-trivial.
Financial markets will be on high alert if inflation surprises to the upside in 2021.
Overview:
On the surface the rationale for low consumer price inflation to continue in 2021 appears straight forward. The economy will be operating with an output gap and that will mean weak wages growth (the unemployment rate will fall, but it will remain above the non-accelerating inflation rate of unemployment–the ‘NAIRU’). In addition we expect the Australian dollar to appreciate a little over 2021 wh ....

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