The increasingly fragmented geopolitical landscape could increase the frequency of supply shocks and raise the risk inflation expectations adjust higher, said Reserve Bank of Australia Governor Michele Bullock.

Speaking at an industry conference Tuesday in Melbourne, Bullock noted the world prior to the COVID-19 pandemic was characterised by deflationary impulses emanating from Asia and China. While central banks aim to look through supply shocks, if they keep occurring and the public adjusts its inflation expectations, this presents a problem, she said.

Bullock added current inflation was driven by an underlying demand component, which the RBA wanted to address. Inflation would present a crucial challenge over the next one-two years, Bullock said. She noted low productivity growth alongside wage increases was also adding to the inflation challenge.