The era of relatively stable inflation is over and price pressures are set to fluctuate more as the economy is buffeted by climate change, the energy transition, the move away from globalisation and other developments, departing Reserve Bank of Australia governor Philip Lowe has warned.
Dr Lowe used his final public speech as central bank governor to take a veiled swipe at the spending decisions of some governments and call for better alignment between monetary and fiscal policy.
"During my term, there have been times where monetary and fiscal policy worked very closely together and, at other times, it would be an exaggeration to say this was the case," he said, citing the pandemic as a period when coordination was most effective.
"We saw just how powerful it can be when the government and RBA work very closely together."
The governor said the "forceful" action taken by the government and the central bank during the pandemic had been effective: "The Australian economy avoided falling into the abyss and then bounced back well.
But he admitted, with hindsight, "we did too much".
"We ... had to make decisions under great uncertainty and with incomplete information. We got some things right, but we got other things wrong," Dr Lowe said.
While the government has banked most of the revenue windfalls it has received and has used energy price caps and other measures to help hold living costs down, it has been criticised by some for not doing more to tackle inflation.
Dr Lowe did not single out any government but said "fiscal policy could provide a stronger helping hand" to the central bank, and suggested stripping governments of some spending decisions and handing them over to an independent body.
The RBA governor was critical of the recent RBA review for not paying greater attention to the issue.
Dr Lowe admitted his term had been defined by his infamous statement made during the pandemic that interest rates would remain very low for the following three years.
"That guidance was widely interpreted as a commitment, rather than a conditional statement, that interest rates would not increase until 2024," he said.
"There has been much criticism since, especially by those who borrowed during the pandemic based on our guidance.
"But I ask that people keep in mind the circumstances we faced in 2020. It was a very scary time. An unknown virus was sweeping the world, our international borders were closed."
The governor backed government investment, but said it needed to be done within a "well-established framework, based on rigorous cost-benefit analysis".
Dr Lowe said the nation's productivity performance was "not encouraging".
"The problem is not a lack of ideas. Instead, it is in building the consensus within society to implement some of these ideas. This is, fundamentally, a political problem, and it is a major problem," he said.
The governor also rejected the idea the central bank was to blame for high house prices.
"Interest rates influence housing prices, but they are not the reason that Australia has some of the highest cost of housing in the world," he said.
"Rather, it is the outcome of the choices we have made as a society: choices about where we live; how we design our cities, and zone and regulate urban land; how we invest in and design transport systems; and how we tax land and housing investment.
"In each of these areas, our society and politicians have made choices that lead to high urban land and housing costs. It is by tackling these issues that we can address the high cost of housing in Australia."
The governor admitted the problem was being exacerbated by current high population growth because, "people want to come here. I can understand why ... because this is one of the best places in the world to live".
His seven-year term as governor, which formally ends of September 17, has been marked by three distinct phases.
His first four years were marked by sustained low interest rates as the central bank strived to support growth and prevent inflation slipping far below the 2 to 3 per cent target band.
But the advent of the pandemic and its aftermath forced a radical shift, initially driving interest rates down to almost zero before unleashing one of the most aggressive hiking cycles in the bank's history as inflation surged.
The effectiveness of the RBA's action in driving down demand was underlined by national accounts figures released on Wednesday which showed household consumption grew by just 0.1 per cent in the June quarter.
Overall, annual growth slowed to 2.1 per cent. Despite this, the unemployment rate remains at a near 50-year low of 3.7 per cent.
Even if unemployment increases, as the central bank expects, economists think there are good prospects the Reserve Bank will be able to pull off Dr Lowe's goal of bringing inflation down without sending the country spinning into a job-destroying downturn.
The RBA governor ends his 43-year career on September 17.