The Reserve Bank has stuck with its peak inflation prediction of eight per cent towards the end of last year and expects inflation to simmer down during 2023.
Speaking at a parliamentary committee on cost of living pressures, RBA head of economic analysis Marion Kohler said the central bank was reviewing its economic forecasts and that inflation had already peaked.
Official inflation figures showed consumer prices lifting at an annual rate of 7.8 per cent in the December quarter.
The RBA has been hiking interest rates since May 2022 in response to soaring inflation.
Dr Kohler acknowledged the pain mortgage holders were feeling from higher interest rates.
"We understand that some people are finding the rise in interest rates difficult to manage and others will have to cut back on discretionary spending.
"However, high interest rates are necessary to ensure that the current period of high inflation and cost of living pressures does not persist too long."
Dr Kohler said Australia's cost of living crisis had hit different income groups fairly evenly compared to other nations.
That's because inflation has been relatively broad-based and pushed up prices for essentials and discretionary items.
She said Europe's cost of living crisis was not being felt equally.
"There, lower income households have been hit relatively harder by higher energy prices than higher income households have been."
The Senate committee, which was set up last year to investigate cost-of-living pressures, also heard from energy companies on Wednesday.
Ampol government affairs head Todd Loydell pointed to the financial burden imposed on its fuels business by measures such as upgrades to fuel standards and strengthening of the safeguard mechanism.
He said the costs associated with meeting these policy priorities and investing in the solutions would ultimately be paid for by consumers.
"So you can see there are trade-offs to be made between the cost of living, fuel security and the energy transition," Mr Loydell said in an opening statement to the Senate inquiry.
The Senate committee on the cost of living will also hear from Woolworths and welfare groups on Wednesday.
Liberal senator and committee chair Jane Hume said the cost of living was the top issue for Australians.
"Prior to the election, Labor said they had the answers. It seems to be getting worse, it's the worst inflation figure we have seen since 1990," she told Seven's Sunrise program.
"At the beginning of the year, with people going back to work and school, Australians are feeling the pinch of the grocery take-out, petrol browsers, paying their bills and mortgages."
But Senator Hume denied that the committee would be used as a witch-hunt against the government.
"We will consult with industry, individuals, groups and find practical, implementable solutions to the cost-of-living crisis."
Australian Associated Press
