Reporting by David Taylor

Financial markets have withstood a bit of volatility recently as more than a few murmurs surface about whether higher inflation and therefore interest rates might remerge.

Yesterday Blackrock’s Global Chief Investment Strategist Wei Li told an Australian Financial Business Summit that central banks may need to prepare for a world where inflation settles in the 3 per to 4 per cent range, rather than 2 per cent to 3 per cent range.

"Three is the new two in this environment," she said.

It’s consistent with concerns many economists and analysts hold that services inflation will remain sticky and difficult to reduce further – think rental prices, insurance premiums and utility bills to name a few.

But wait, there’s more…

The National Australia Bank has just released its February Monthly Business Survey.

The report is a snapshot of business conditions and confidence and the general operating environment. It’s also widely watched because the bank surveys hundreds of businesses from across the economy.

The first half of the “top line” of the report is encouraging saying, “Business conditions rose in February, with the survey signalling the economy remained resilient in the new year,” but the rest of the sentence reads, “and inflation is still a challenge despite slowing growth.”

It’s clear from the NAB’s business survey that the economy is proving resilient in the face of some pretty strong headwinds, but some sectors are being punished by higher interest rates.

“Trading conditions and profitability lifted in the month, pushing business conditions back above their long-run average – though conditions softened further in retail and construction, sectors that are particularly exposed to the ongoing impact of tighter monetary policy,” the bank noted.

The Reserve Bank’s 13 interest rate hikes are clearly doing their job, but some pesky inflation remains and it’s proving very difficult to squash.

To make matters worse, businesses, based on this survey, clearly feel they have the pricing power to pass on higher costs.

“Businesses continued to report elevated rates of cost growth across both labour and materials inputs, and with activity holding up it appears firms still have scope to pass some costs through to consumers.”

“Retail price growth, in particular, rose sharply to 1.4% in quarterly terms after slowing over the Christmas/New Year period, in a sign that further progress on inflation is unlikely to be smooth over the months ahead,” NAB noted.

I’ll let the NAB’s chief economist Alan Oster have the last word:

“Ultimately, these results are a good reminder that a lot of the progress on inflation to date has been driven by the improvement in the global supply environment and from here, the improvement is unlikely to be linear,” said Mr Oster.

“While we do expect inflation to return to the RBA’s target band in 2025, plenty of risks remain that could throw us off that course.

“That is why we expect the RBA to take a cautious approach with rates to be on hold for most of this year.”