The Australian Economy in 2022–23: Inflation and Higher Interest Rates in a Post‐COVID‐19 World

• Published date: 01 March 2023
• Author: Sarantis Tsiaplias,Jiao Wang
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/1467-8462.12498

The Australian Economic Review, vol. 56, no. 1, pp. 5–19 DOI: 10.1111/1467-8462.12498

Special Article

The Australian Economy in 2022–23: Inflation and

Higher Interest Rates in a Post‐COVID‐19 World

Sarantis Tsiaplias and Jiao Wang*

Abstract

Record levels of domestic and global stimulus

during the COVID‐19 pandemic years helped

to mitigate largely unparalleled downside

risks. Post‐COVID‐19, inflation surged in

Australia due to overseas factors such as the

war in Ukraine, and domestic factors such as

COVID‐related backlogs in the construction

sector. To constrain inflation, the Reserve

Bank shifted to a phase of aggressive

monetary policy tightening in 2022. There

are, however, cost of living ramifications

associated with tighter monetary policy.

Looking forward, there is significant uncer-

tainty about the rate at which inflation will

normalise, and the spending response of

consumers to higher interest rates.

1. Introduction

The Australian economy, much like the global

economic landscape, was characterised by

surging inflation and cost of living in 2022.

Inflation surpassed 7 per cent in the September

2022 quarter, averaging an expected 6.4 per

cent for the 2022 calendar year. Underlying

inflation, which the Reserve Bank of Australia

(RBA) tends to focus on, averaged an expected

4.8 per cent in 2022, well above the RBA's

2–3 per cent inflation target.

In response to higher inflation, the RBA

Board commenced a phase of monetary policy

tightening in May 2022. In every month from

May to December, the target rate was raised

from a record low 0.1 per cent to 3.10 per

cent. This had significant ramifications for the

cost of living, given the mortgage rate

pressures stemming from higher rates. In this

respect, the cost of living for employees, who

have benefited from a prolonged period of

low interest rates, increased inordinately in

2022 (compared to other groups such as age

pensioners).

Aggregate economic growth was relatively

strong in 2022, with annual growth of 3.7 per

cent for the 2021/22 fiscal year, compared to

2.2 per cent for 2020/21. Over the 2022

calendar year, annual average growth is

estimated to be 3.6 per cent (Table 1).

Domestic final demand in 2021/22 rose by

5.0 per cent, well above the 3.0 per cent growth

in the preceding fiscal year. In calendar year

terms, annual average growth for domestic final

demand is estimated to be 5.1 per cent.

* Tsiaplias and Wang: Melbourne Institute: Applied

Economic & Social Research University of Melbourne,

Parkville, Victoria, Australia. Corresponding author:

Tsiaplias, email <stsiaplias@unimelb.edu.au>.

We thank Guay Lim, Ian McDonald and Ross Williams

for helpful comments.

© 2022 The Authors. The Australian Economic Review published by John Wiley & Sons Australia, Ltd on behalf of The University of

Melbourne, Melbourne Institute: Applied Economic & Social Research, Faculty of Business and Economics.

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