This from RBS's outstanding local team the other day:
"Lower unemployment points to higher underlying inflation: The Reserve Bank's preferred approach to forecasting underlying inflation is a modified Phillips Curve, where inflation driven by unemployment, the change in unemployment (a "speed-limit" effect), and inflation expectations, with a small role for the exchange rate via import prices. Using this model, our analysis shows that a sustained fall in unemployment to the 4s points to inflation above the 2-3% target band, especially now expected inflation is slightly above 3% for the first time since May. The dollar at parity provides some offset, but this suggests that the risks are inflation will push higher this year. This should see the Reserve Bank tighten monetary policy, although the unexpected worsening of the Queensland floods is likely to see the Bank delay hiking until Q2 rather than in February as we had earlier forecast (note that the market is pricing in a 3% chance of a 25bp cut in February after the floods worsened)."
