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Inflation to persist in 2022: Aviva

Inflation will dampen Australia's economy in 2022 as it continues to soar significantly higher than expected, according to Aviva Investors.

While Australia's growth outlook for 2022 is strong, backed by a lower unemployment rate, inflation has the potential to derail the nation's progress.

"Many of the reasons for higher inflation are well known and it should fall back meaningfully next year, suggesting that inflation is better described as persistent rather than permanent. Nevertheless, it has been high enough for long enough to impact both sentiment and behaviours," Aviva head of investment strategy and chief economist Michael Grady said.

Citing the RBA, a sustained period of inflation near the centre of the target range - about two or three quarters - is expected in the near term.

"That raises the bar for tightening policy rates compared to previous cycles, particularly while wage growth remains subdued. Given that, we don't expect the RBA to raise rates in 2022, but instead look to early 2023. However, the risks are likely tilted to a somewhat earlier start if patterns we are seeing play out in other developed economies, where wage and inflation dynamics are more advanced, begin to show up in Australia," he said.

In 2022, consumer and business confidence is expected to remain robust. While the support from fiscal policy will be reduced, Grady sees a number of longer-term public sector investment projects in the pipeline, and a boost in federal spending ahead of the next federal election, which is expected to take place around May.

As the pandemic fades, coupled with strong growth and persistent inflation, these will lead to emergency policy settings no longer being needed. He also thinks that central banks will tighten monetary policy slowly but steadily in coming years, but will the pace and timings will vary across different regions.

Turning to the share market, Aviva is retaining "a moderate positive position".

"We maintain a negative stance on government bonds because of upside risks to inflation as well as the tightening bias from global central banks. Rate hikes could happen faster than markets currently believe and expected terminal rates look potentially under-priced," he said.

Emerging markets meanwhile, are expected to underperform developed markets in both currencies and equities.

"EM headwinds include modestly slower growth, monetary policy normalisation and the risk of higher real rates as well as the more idiosyncratic risks from politics and regulation," Grady added.

Read more: Aviva Investors