Reserve Bank governor Michele Bullock says Australia’s inflation has morphed into an “increasingly homegrown” problem and could take two more years to get under control.

In a warning sign that homeowners should brace for more pain, Bullock said the RBA must use its “blunt tool” of interest rates to bring down inflation “to serve the welfare of Australians collectively”.

On top of soaring prices of goods, Bullock said everything from haircuts to dentists and dining out were rising “strongly” as demand for services outstripped supply in the economy.

Against this demand-driven backdrop, she said the next push to bring inflation back within the central bank’s 2-3 per cent target range was expected to take roughly two years.

“We expect it to take another two years for inflation to… move below 3 per cent,” she said.

“This is because much of the remaining task of bringing inflation back to target will require bringing aggregate demand and aggregate supply into closer alignment.

“That is what the board is aiming to do with monetary policy – to slow the growth of demand enough to bring inflation back to target while keeping employment growing.”

Bullock was addressing an Australian Business Economists dinner in Sydney on Wednesday night.

The RBA has been lifting interest rates since May last year to bring inflation under control. It hiked the cash rate by 25 basis points to 4.35 per cent in November, following several months when rates were held steady.

The Reserve Bank chief said initially inflation in Australia had been triggered by supply chain problems during the pandemic and the war in Ukraine.

When supply chain issues were the main price pressures, inflation fell from 8 per cent to 5.5 per cent over three quarters as these disruptions resolved.

But Bullock said the problem had since shifted from supply chain issues to demand outstripping supply, as well as labour shortages.

“The remaining inflation challenge we are dealing with is increasingly homegrown and demand-driven,” she said.

Struggling households

Bullock said she was well aware of the impact of the RBA’s decisions on Australians, especially those on low incomes.

“I receive letters from people who are finding it difficult to make ends meet and I speak with organisations that assist struggling households,” she said.

“Everyone is seeing prices for goods and services rise strongly. But this has a particularly severe impact on low-income households.

“This emphasises the need to get inflation back down.

“I also know that interest rate rises are squeezing the finances of households with a mortgage.

“But while the board recognises there is a wide diversity of experience, the bank’s statutory objectives are economy-wide outcomes, and our key tool – the interest rate – is a blunt one.

“The board must therefore set its policy to serve the welfare of Australians collectively.”

Next year is shaping up as a tougher one for Australian households.

Opposition finance spokeswoman Jane Hume said charities were experiencing record demand as financial pressures escalated.

“We have consistently heard that the best thing the government can do to help take the burden off these charities and help families is to get inflation down,” she said on Wednesday.

She said this was the only way to take pressure off the Reserve Bank so it could stop lifting interest rates.

Assistant Treasurer Stephen Jones said the Albanese government’s restrained budget management, including banking more than 80 per cent of new revenue, was helping the RBA beat inflation.

“Our job in Australia is to ensure that we don’t make a bad situation worse … which would make more pressure on the Reserve Bank to jack rates up,” he told Sky News on Wednesday.

-with AAP