Ms Bullock said the supply chain disruptions that caused the initial surge in global inflation in the last couple of years have eased, but Australia is still experiencing price rises because of strong domestic demand.

In what will unnerve struggling mortgage holders, she suggested this means further cash rate hikes could be necessary.

"A more substantial monetary policy tightening is the right response to inflation that results from aggregate demand exceeding the economy’s potential to meet that demand," Ms Bullock said at the Australian Business Economists Annual Dinner in Sydney last night.

"If inflation is simply the product of global supply disruptions or other price rises that monetary policy has little influence over then the appropriate response from interest rates would generally be limited...[a] shift from mainly supply-driven to mainly demand-driven inflation has been a part of our inflation outlook for some time."

Ms Bullock reiterated that economic activity and inflation continue to be more resilient than expected, and for NAB economist Taylor Nugent, it was enough to suggest more rate hikes are around the corner.

"NAB expects a hike in February," Mr Nugent said.

"The board will assess the single 25 basis point adjustment delivered in November is not enough to mitigate the risks on inflation inherent in that upward revision to the outlook."

Sally Auld, Chief Investment Officer at JBWere, said the remarks were definitely hawkish.

"If you just read the first half of her speech...you would be thinking there was at least one, if not two, more rate rises coming down the pipe," Ms Auld said.

The supply to demand shift

Around the world, Covid related disruptions to supply chains, as well as the war in Ukraine, played a big role in the initial burst of inflation.

Government stimulus packages and large savings built up during the pandemic meant demand for goods stayed strong, so inflation soared as supply couldn't keep up.

Ms Bullock though says global supply chains have been recovering, which has seen goods price inflation ease around the world; the Israel-Hamas conflict has caused some uncertainty but so far the inflationary effects have been benign.

In the year to the December quarter '22, the CPI indicator showed the price of goods rose 9.5%, but just three quarters later, this had moderated to annual growth of 4.9%.

However, service price inflation has proven more persistent, rising 5.8% in the year to the September quarter, and Ms Bullock says many service industries are still seeing prices go up.

"Hairdressers and dentists, dining out, sporting and other recreational activities - the prices of all these services are rising strongly," she said.

"This reflects domestic economic conditions and is an indication that aggregate demand is sufficiently greater than aggregate supply to sustain these price increases."

She also pointed to limited spare capacity among Australian businesses as evidence inflation in Australia is being caused by demand.

"There continues to be a clear link between services inflation and measures of spare capacity, since it is easier to raise prices when firms cannot keep up with customers’ demands," she said.

The labour market is a prime example: with unemployment still at just 3.7%, it's likely many Australian businesses simply don't have the staff to service all their customers, which could lead to price increases.

No respite for mortgage holders?

Ms Bullock acknowledged in her speech that for plenty of Australians, her message would not resonate.

"I know that interest rate rises are squeezing the finances of households with a mortgage," she said.

So far during the rate hiking cycle, there has not been a sharp rise in default rates, which Ms Bullock has attributed to strong household buffers, but there are concerns developing that mortgage holders might be nearing breaking point, particularly after the most recent increase.

Credit bureau Experian says two thirds of lenders are reporting an increased risk of consumer default and hardship, while according to Equifax, the number of mortgage accounts that have been in arrears between 30-90 days is 47% higher than this time last year.

Ms Bullock though reaffirmed her commitment to fighting inflation, emphasising the corrosive impact of inflation for people who are struggling.

"Everyone is seeing prices for goods and services rise strongly but this has a particularly severe impact on low-income households," she said.

"This emphasises the need to get inflation back down."