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The Reserve Bank’s statement on monetary policy helps us understand a bit more of the reasons the central bank said on Tuesday that further interest rate rises are still to come.

As seen in the revisions since its previous statement in November, the RBA is forecasting underlying inflation will be higher in 2023, albeit only marginally so.

The so-called trimmed mean measure of inflation will be 6.25% by June and 4.25% by December. That compares with 5.5% and 3.75% that it had expected three months ago.

Underlying inflation excludes some of the more volatile price movements to get to a truer view of price pressures than the headline (grabbing) consumer price index.

For the December quarter, the media largely focussed on the 7.8:% CPI number for annual inflation, the highest in 32 years.

The underlying rate of 6.9% got less attention but probably warranted more since it was a record high, more than the 6.5% forecast by the RBA, and more importantly is what the central bank most closely watches.

When you hear the RBA has a 2%-3% target band for inflation the measure they want to see in that mix is that trimmed mean version.

Anyway, the slightly more upbeat view today is that underlying gauge will fall back to 3% by the end of next year (earlier than tipped previously). The CPI version won’t drop to that level until mid-2025, according to the latest projections.

Of course these are all model-based forecasts and include inputs such as the bank’s cash rate reaching “around 3.75% in the second half of 2023”. (We saw in the earlier post that investors are now betting it will top 4%, just.)

Things might not turn out as expected, such as household spending could prove more resilient to the interest rate hikes than currently predicted. (Or it could decline faster.)

And “inflation could turn out to be higher than expected if the high inflation environment leads to greater feedback between wages and prices than has been typical in the inflation targeting era” the RBA said.

As it stands, though, the RBA is not forecasting much of an upswing in wages, with the wage price index continuing to lag inflation (and so real wages continue to sink). The RBA says other incentives, including promotions, will mask the full size of compensation for us toilers.

Nothing too surprising so far. Stay tuned for more.