By James Glynn
SYDNEY--The Reserve Bank of Australia has sharply raised its near-term forecasts for inflation, but said it still remains confident that both headline and core measures of inflation will still return to target by late 2025.
The central bank on Tuesday forecast consumer price inflation at 3.8% on year by the end of 2024, up from a 3.2% forecast in February. It also lifted its forecast for trimmed mean inflation to 3.4% on year by the end of 2024, up from a February forecast of 3.1%.
Still, both measures of inflation are projected to fall back to 2.8% on year by late 2025, putting them within the desired target band of 2% to 3%, the RBA said in its May statement on monetary policy.
Rising fuel prices and the removal of government rebates to help offset soaring electricity prices are expected to add to inflation in the near term, the RBA said.
"The pace of disinflation has slowed, and the economy is assessed to have slightly less spare capacity than previously thought," the central bank added.
But the impact of one-off factors driving inflation higher will be brief.
"Despite the upward revision to inflation over the year ahead, the inflation outlook is little changed further out," the RBA said.
"Output and unemployment gaps are projected to close over the forecast period, bringing the economy back to a balanced position and inflation back to target," it added.
The major risks to inflation over the next year will come from prices for services.
"The more gradual decline in services inflation relative to goods inflation is in line with trends overseas...Further easing in services inflation is necessary for inflation to return to target," it added.
Growth in rents is expected to remain a major force under inflation over coming year, the RBA said.
"It will take some time for the expected increase in dwelling investment over the next few years to feed through to lower pressure on rent growth," it added.
Write to James Glynn at james.glynn@wsj.com; @JamesGlynnWSJ
(END) Dow Jones Newswires
05-07-24 0052ET
