Former Reserve Bank of Australia (RBA) governor Bernie Fraser says there may be a need to re-think the way the central bank tackles inflation, if rises in food and fuel prices persist.
Mr Fraser was governor of the RBA from September 1989 to September 1996 and oversaw the introduction in 1993 of the central bank's medium-term inflation target of 2%-3%.
He now says the target may need to be reviewed if the recent upswing in the prices of some foods and fuel turn out to be ``secular'' - that is, a lasting shift - rather than cyclical - part of the regular ebb and flow of prices.
"We're not there yet, but the question is going to arise, are some of these increases not seasonal, not episodic, but structural and secular?''
Mr Fraser says fuel is a key example because it influences the prices of so many goods and services, raising the question of what to do it fuel continues to rise.
"If secular fuel prices push up inflation, either directly or indirectly, should the Reserve Bank be pushing up interest rates because of inflation that's driven by those secular increases, or does there need to be some other treatment?''
Mr Fraser said the current economic situation could have a parallel with the policy response to recessions before the advent of the theories of influential English economist John Maynard Keynes.
"The orthodoxy pre-Keynes was for governments to tighten their belts, and that of course just made things worse,'' he said.
"Now, if we're going to be faced with secular oil-price rises, that's going to directly and indirectly push up inflation.
"But it would be wrong, in my view, for the Reserve Bank to respond to that sort of increase in inflation by pushing up interest rates.''
Mr Fraser acknowledges the RBA's current monetary policy focus is about preventing domestic demand from outrunning the economy's supply potential.
"That's one of the drivers of inflation, of course, and that's something that central banks are always and should always be concerned about,'' he said.
"But I'm suggesting that maybe at some point they'll have to try to distinguish or separate those sorts of concerns with some of the additional concerns that are coming from those fuel and food price rises, subject to how secular they turn out to be.''
If those trends in prices did turn out to be secular, flexibility was the obvious response.
Mr Fraser agreed this might mean allowing inflation to remain outside the target band for longer to avoid unnecessary damage to the economy.
"That's very much the point,'' he said.
Fortunately, the regime introduced under Mr Fraser's tenure as RBA governor was inherently flexible, bucking the trend followed by other central banks at the time.
"It was against the background of what the New Zealanders were doing, and the Bundesbank and the European counties, where they were legislating very narrow and very rigid targets,'' Mr Fraser said.
The RBA's target - since enshrined in formal agreements between the RBA governor and the treasurer - is to keep consumer price inflation "between two and three per cent, on average, over the cycle''.
Since the target was introduced, the headline inflation rate has averaged very close to the centre of the range, despite being outside it slightly more than half the time - even allowing for the introduction of the GST in 2000.
"That's the sort of pragmatism and flexibility you need in policy making rather trying to keep the rate of inflation within two to three per cent every single year,'' Mr Fraser said.
"That would be madness in my view.''
The other key aspect of the RBA's mandate is to have regard to growth and employment as well as inflation.
This distinguished the RBA from most other central banks, with the notable exception of the US Federal Reserve.
"Our bank, if it does weigh these things up properly, is better placed to reach sensible outcomes, more pragmatic outcomes, I think, than those central banks that are charged just with keeping inflation within a particular range,'' Mr Fraser said.
As to a possible change in the way the inflation target is implemented, Mr Fraser said it could be approached in different ways if the situation arose.
But that he did not think that point had been reached.
Mr Fraser is not convinced that food and oil price rises will turn out to be secular, rather than cyclical.
"The other element is that there's already a great deal of flexibility in the way that our target is framed,'' he said.
"We can run with inflation being above 3% for a period of time and we can run with it being below 2% for a period of time, as we have done in recent times.''
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