The worse news is that consumer inflation expectations have averaged 3.1% since 1993, so current levels are elevated despite relatively benign core and headline inflation prints over the last year. Clearly, the floods and petrol prices have had an impact. The first chart below shows the monthly Westpac-MI survey data with a moving average (green line) since 1993. As you can see, the RBA has not been successful in keeping a lid on consumer inflation expectations since adopting its inflation targeting regime in 1993 (click to enlarge).
The following charts illustrate Westpac's always useful parsing of the data. The really worrying thing about consumer inflation expectations is that they are already elevated at what is expected to be the beginning of a prolonged boom. At a time when the labour market is fully employed. At a time when the wage cost index is growing at pre-GFC levels. At a time when the currency is likely to depreciate (over a 12-18mth horizon) as US yields inevitably rise. At a time when there is an exceedingly strong inflationary impulse in China (ie, rising wage costs), which Australia almost certainly risks importing. And at a time when the world is enduring a range of supply shocks--to oil and food, in particular--which are generating cost-push pressures.
