Prices rose by 3 per cent on average in the last year, their highest rate of change for several years.
The RBA wants inflation to be between 2 per cent and 3 per cent. If inflation gets above 3 per cent, it will generally lift the official cash interest rate to keep inflation down. [for a nice simple explainer on how and why the RBA does what it does, follow this link.]
Higher interest rates make it harder to do business. If the RBA lifts interest rates now, while unemployment is at its highest level in years, the improvement in the labour market might slow down.
Basically, the RBA is in a pickle. It is an “inflation-targeting” bank. Our entire economy hinges on the idea that lower interest rates create both growth and inflation. If they only create inflation, then we are stuffed.
It nervously awaits the next release of inflation data (in 3 months time) and the next release of unemployment data (on August 7th). We should all be on the edge of our seats.
n.b. the fact that the red line is below the blue line in the graph above means we have negative real official interest rates! The fact that money is losing value should be enough to get people spending it.