Can macroeconomic policy ensure the inflation target?

If Australian wages do not increase sufficiently in line with economic capacity, it risks a shortfall in aggregate demand that will make the achievement of an inflation target very difficult, or even impossible.

In announcing the most recent monetary policy package, the Governor of the Reserve Bank (RBA) made it clear that “The Board will not increase the cash rate until actual inflation is sustainably within the target range” of 2-3 per cent. The Governor then went on to say that “For inflation to be sustainably within the target range, wage growth will have to be materially higher than currently. This will require a lower rate of unemployment and a return to a tight labour market.”

Presumably, the…