Transcript of Question & Answer Session Inflation and the Impact of the Middle East Conflict

Dr. Hunter, thank you very much for your presentation and the speech today, very well received. And thank you everyone here for joining us. Just very first, before we kick things off, very first housekeeping. Is that we’re going to have a QR code that’s going to pop up on the screen, and we’re doing the Q&A through that. So, I’ve got a couple of questions, but after that, OK, well, we’ve heard Governor Bullock discuss this. We’ve now heard you discuss inflation expectations. I’m not going to be very surprised if Deputy Governor Hauser doesn’t talk about inflation expectations when he gets up in the not-too-distant future. We’ve also - you noted, and it’s something that we’ve put out in our work, about how much in the short run those expectations are very highly influenced by those prices that people see every day, and particularly that core anchor, the pump price, the petrol price. We’ve seen that that has come down to almost pre-war levels and pretty much where we were through 2025, thanks to a higher Aussie dollar, the cost-of-living relief from the government. So, according to the petrol price, it’s over. Right? What are you guys worried about? What’s, what’s coming?

I’m not going to pretend we have a crystal ball on how things play out from here. I wish I did. I can give it a rub and we’d be ahead of the curve. We’re not. We don’t know how this is going to play out. I mean, I think petrol prices are really important, and you’re right, they have come back down through a combination of different factors, but they are salient for expectations, but they’re not the only price that matters. I think just in terms of filling up your car, some people in the room might well be driving diesel vehicles, diesel prices have not come back down all the way. They have come down a fair amount though. And we’re also conscious that expectations are anchored actually to a wide variety of goods and services. Some have more impact than others, which is what we mean by salient, but that doesn’t mean the others don’t count. And we can see in the surveys and in other measures of short-term expectations that those have lifted up. We’re not surprised to see that. That’s what we would expect in this kind of shock. But it is something that we’re conscious of and mindful of. And I think really, as I said in my opening remarks, it’s another inflationary shock that’s coming through not that long after the last one, which was not that long after the one before. So there’s, I think, a combination of things that mean we’re always mindful and watching inflation expectations. That’s the job. I don’t think you’ll ever get a central banker say they’re not worried about expectations. But we are perhaps more worried now than we have been in the past because of circumstance and what we’re facing into. But no, you’re not wrong on petrol prices. They have come back down.

Now, it’s tempting to, when you’re preparing for one of these things, we’re all jumping into AI now to come up with questions. But one of the issues that has come up in, you know, the Governor post-press conference, you’ve mentioned it again, is where we were and that pressure on the economy going into this shock. So, we’ve got the inflation shock from oil, we’re going to have a lot of the, You know, we’re yet to really meaningfully see the confidence shock of this that’s come through to consumers and businesses pulling and reining back in their spending. But, you know, We’re hearing constantly new announcements all the time the government working with the hyperscalers. There are this massive wave of investment coming into the economy. I would imagine that’s troubling. We might need to make way for that. How is the RBA thinking about how AI - this construction boom is affecting the economy?

Yeah, look, I mean, the AI boom is spectacular by any measures. I think, just looking at what it’s doing to the global economy at the moment, we can see the investment that’s happening in the US. We can see the supply chain implications of that across Asia. So, you know, when you build a data centre wherever you’re building it in the world, you’re probably importing substantial amounts of capital from Asia. That’s the machinery and equipment that goes in it because they have that in their manufacturing base. We can see its impact very clearly and we can also see it happening here in Australia. We got a big burst of activity back in the September quarter. It was sort of held into the back end of last year. We’ll get capital expenditure expectations in the next couple of weeks, and that will give us a bit more of a read on going forward, but we do expect that there will be further activity, that’s pretty clear. In terms of how that then fits into that broader, bigger picture for the outlook for the economy and how do we think about it, we really do think about aggregate demand and how that measures up against the economy’s productive capacity. In this particular case, we’ll think about two things; One is the size of the activity, but also I think importantly, two, what size of that activity is happening domestically and what are we importing? Because as I just said, we import the computers, the servers, and all the other equipment largely that gets placed in the data centre. We do have to build the “shed” I’m told is the right word from the guys that operate in this sector, but what goes in it, that comes from overseas. So there’s two things that we have to think about, because if we’re importing it, that’s not adding to our domestic aggregate demand. So, we are conscious of that balance and it is an aggregate picture. It is incredible how the economy will respond and move resources to where they’re most in demand, and that’s what matters for policy, but you also have to remember the import side.

I’ll go one more before opening it to the floor, although this is sort of also prompted or linked into one of the questions from the floor. When we think about that AI boom, a lot of jobs building the sheds, but we could have been building those sheds for something else. I don’t think that there’s - I don’t know, I’m an economist, but - for Bloomberg, but I don’t think that there’s that many jobs in those sheds compared to the jobs that we would have seen before. And then we do have the impact as AI continues to be rolled out through the economy, on productivity, employment in a whole range of sectors. Pointed out that, you know, the US, AI is a very big part of the demand story we’ve got there, but we’re seeing very low US jobs growth. I was conscious of one of the research pieces you pulled up towards the end there, talking about highlighting how sometimes participation is encouraged, or we do see a lift in participation when monetary policy does tighten. It’s been the unemployment rate we’re looking at now. If we kept the 2025 participation at the beginning of 2025, we’d have an almost 5% unemployment rate. A different policy discussion. If we find ourselves with a you know, if Trump seems to get a nice deal, if he gets a magical deal, Strait of Hormuz, we get some things flowing again, it’ll be a while before supply chains come down. We’ve got this AI investment boom, if the inflation supply shock dissipates and we get a bit of a participation boom, that’s sort of an environment that’s maybe low inflation, maybe a bit higher unemployment. How quickly can we pivot?

Pivot is an interesting word to use. I think maybe there’s a few different themes in your question there. I’d say, just in terms of the impact of AI on the labour market, which would be one potential theme. I think we really do have to wait and see. The Governor actually gave a speech in the second half of last year talking about this and some of the different channels. I think that our expectation is that AI takes away some of the more mundane, repeatable, routine tasks that we probably all have in our jobs to varying extents. And that will be very good for productivity because AI doesn’t have to take a holiday, it doesn’t get sick, and it will change the way people work and the jobs that they do. But I also think that if we look back through history, what you can see from sort of repeated waves of generalised technology like this is technology that cuts right across the economy, that’s not specific to one sector, you generally find that jobs adapt and evolve and we change the way we work. And that changes the shape of organisations. It also usually enables a whole bunch of new jobs that have not existed in the past. And the personal computer is a really great example of that. There’s a large proportion of jobs that exist today didn’t exist in about 1980, pre the personal computer. The other example I quite like on this was someone pointing out to me that when the spreadsheet came into being and Microsoft Excel was rolled out across computers in the sort of late ‘80s, early ‘90s. At the time, people were saying this is the end for accountants, Excel is just going to do away with their jobs completely, and we won’t need them because you’ve got this technology that does it for you. That’s not quite come to pass, of course. So I think that we have to be a little bit careful, and it’s hard to imagine what the new jobs are because we haven’t seen them before. But I think that we will get at least some of those. In terms of your other sort of more cyclical question, I suppose, about what happens if the labour market softens a bit more than we anticipate, if we get a faster resolution to the conflict, or perhaps more pertinently from a macroeconomic perspective, that the oil price comes back down more quickly, that the flows return, that the system normalises. That’s a different view of the world, absolutely and that’s why the job for us is never done. And we’ll certainly be watching for that. And it’s one of the risks that we’re certainly cognisant of. I spoke about it in my speech, and if that happens, then obviously the Board will make their decisions and that’s why they are always attentive to what’s happening to how things are playing out and how the data is playing out. That line is used quite a lot, but that’s the reason, because we know things are always changing.

No, if anything, you know, Treasurer Chalmers talked about his productivity agenda, but, you know, just thinking of those accountants with the Excel, I think if there’s anyone out of the budget that’s got a bright idea two, three years ahead of them, it’s definitely the accounting and legal sector. Another question from the floor. Going to sort of slightly add a little bit to it. You mentioned in your speech, and also Governor Bullock mentioned it, is, you know, we have seen a real wage decline, or a decline in living standards. And then, as if we sort of do see some downward pressure on the property market post the budget, and also post the rate hikes, how do you see the combination of those things? On the one hand, if there is perhaps an overcorrection of investor demand and we see rents rise in the property market, versus the wealth effect of those property prices going down. Where of those sort of post-budget or post-rate hike housing challenges has anything shifted, and how are you thinking about how that might affect inflation?

This is a really tough time for households in terms of what’s happening with real incomes. As I said, we can’t do anything about this shock. It’s literally come to us from overseas. It’s not something we have in our control and it’s going to flow through the economy. It already is and we’re going to find out what the impact will be as we get the data, but this is definitely tough. We hear that in our liaison program when we talk to community organisations. We know some people in the community are doing it really, really tough. And we do also know as well, you mentioned the rate hikes that when we use the interest rates, it is a blunt tool. It affects different people in different ways and those distributional aspects are very tangible and they matter even if they are at an aggregate sense, they at least partially offset one another. If you’ve got a mortgage, higher rates are more challenging, absolutely. But we also have a bunch of people that are savers where it’s obviously the opposite impact. And of course, we are just trying to get inflation down and that is good for everybody once we manage that, that’s obviously the north star for us and we are conscious of that. We’ll be looking to see how that might impact some of those changes to tax treatments and how they flow through into the housing market, how they might flow through the economy more broadly. We’re still digesting the budget and what it means and so we’ll have more to say on that in coming months in our next set of forecasts and beyond that in general, that household wealth channel is important as well and so we’ll be monitoring that very closely. But in the type of scenario, I think that you have in mind, if it’s a weaker outlook for consumer spending and then that flows through to weaker aggregate demand, and again, monetary policy will respond to that as appropriate. So, we’re not blind to it, we do see it, and it’s a constant job of tracking it. I’m very lucky to have an absolutely fantastic team that work for me that do excellent work day in, day out, unsung heroes in all of this. This is what they’ll be looking at over the coming months.

One final one. There’s a lot to choose through here. Thank you for the person that point out my inability to comment on non-traded inflation in the services sector, particularly in regards to haircuts. There was an interesting question that came through, which is about trying to dive into how you might be thinking about the aggregate demand impacts of different types of the employment outcomes of different types of aggregate demand within the economy. So, thinking about building those sheds. But also, if we think about within public demand as well, we’ve got what’s been articulated in the budget papers. Again, we have to sort of see whether that all comes to pass. We’ve got a shift from a very large expansion of a labour-intensive services set within the economy, within the social assistance sector, and a rotation away from butter more towards guns and, you know, a capital-intensive expansion of that type of spending and AI, when you’re thinking about this is a level of business investment, that’s my jobs impact, this is my level of public demand, that’s my job impact, how is the team and they are a very talented team, how is the team thinking through and dissecting that?

Yeah, no, it’s an excellent question, I usually describe it as a widget view of the economy, that we just make widgets. And we have these models that just have demand or supply, and it’s just one thing, one product, one good, one service. Obviously, that’s not the real world at all and so that complexity, what you’re talking about in terms of how does labour demand interact with the composition of aggregate demand, and when that composition is changing in particular, that is definitely a focus for us. In fact, you mentioned in the recent years, not actually so much over the last year, but in the years before that, we had the growth of the non-market sector, and non-market sector employment was a key driver of overall employment. We actually did quite a lot of research into understanding that link, and I think I’ll point you back to our February 2025 Statement on Monetary Policy, where we actually had a call-out chapter that deep-dived on this. And so now, yes, conditions are changing, things are pivoting. That composition of employment growth has definitely changed. The market economy has picked up a bit. We’ve seen a bit of a slowdown in the non-market. It’s choppy quarter to quarter, certainly very choppy month to month. So I wouldn’t recommend looking at that data particularly. But we are very conscious of that consideration and really how that shows up not only in the labour market but ultimately into inflation and then the final piece of the puzzle that the team have to put into the mix on all of this is that labour supply response. And that was very interesting to observe. Another bit of research that we’ve done where we did find through COVID, as I mentioned, that for some people they did supply more labour to the economy, they wanted more hours perhaps, or the second person in the home wanted to take on a job because of those cost of living pressures. We think that some of the drop back in participation in recent times is because those cost of living pressures have eased. They’re still there, but they’re just slightly less acute than they were maybe a year or two ago and so we’re conscious that might be reversing and what does that mean? But also then thinking beyond that what does it mean into the medium long term? So yes, all of those things are definitely on the list and we definitely look at them and we often talk about them in the Statement on Monetary Policy. I know it’s a long document and it’s a good page turner for when you go to bed. But when I’m up here giving speeches like this, when others are, we do like to flag it because we think these questions are important.

Dr. Hunter, Sarah, thank you very, very much for your time.