Unemployment & Inflation- Feb 2020
The unemployment rate declined to 5.1% in December and is expected to remain at this level before declining to 4.75% in 2021. This is still above the full unemployment rate (NAIRU) of 4.5%, indicating spare capacity in the labour market.
As a result, wages growth has remained subdued at 2.3%, weighing on consumption and demand-pull inflation.
Core inflation is at 1.6%, below the target band of 2-3%. A slight housing market recovery due to the easing of monetary policy (0.75% cash rate) is expected to give a small boost to inflation. The recent drought has also contributed cost push inflation by increasing prices for a range of items.
Outside of Australia, the world seems to be entering a period of low unemployment and low inflation. This is phenomenal because it suggests a departure from the conventional Phillips Curve relationship – that inflation rises when unemployment falls. Explanations for this dislocation include cheaper imports from globalisation, lowered costs through technological development and increasing digitalisation of commerce.The cash rate is expected to remain accommodative to support the movement towards full employment and target band inflation.