Reserve Bank governor Philip Lowe has warned the rate of inflation could reach at least four per cent this year as a result of rising oil and food prices caused by the invasion of Ukraine.
The floods along the east coast of Australia are also expected to result in higher prices for fruit and vegetables with growing areas hit and supply chains disrupted.
"The risks on inflation have certainly moved to the upside," Dr Lowe told the Australian Financial Review business conference on Wednesday.
"Headline inflation is going to be higher and will have a number with a 'four' in front sometime this year."
However, Dr Lowe said it is still not known whether the increase in prices is temporary or whether it will be sustained.
The RBA has repeatedly said it wants to see inflation sustainably between its two to three per cent target before lifting the cash rate from a record low of 0.1 per cent.
Dr Lowe reiterated to sustain higher rates of inflation you have got to have wage inflation growth above three per cent.
Current wage growth at 2.3 per cent, as measured by the wage price index, is still only where it was prior to the pandemic.
"Given the outlook, though, it is plausible that the cash rate will be increased later this year," Dr Lowe said.
Most Australians appear to be expecting the first official rate rise in a decade over the next year.
The latest Westpac-Melbourne Institute consumer sentiment survey for March found just over two third of respondents are expecting a rate rise, the highest proportion since August 2011.
Westpac chief economist Bill Evans retains the view that the first move will be in August after quarterly inflation reports on April 27 and July 27.
Consumer sentiment fell 4.2 per cent in March to 96.6, and below the 100-level which indicates pessimists outweigh optimists.
Mr Evans said this was the weakest result since September 2020, but came as no surprise.
"The war in Ukraine; the floods in southeast Queensland and northern NSW; ongoing concerns about inflation and higher interest rates were all likely to impact confidence," Mr Evans said.
The survey did not capture the flood disaster that is now impacting greater Sydney.
Patrick Coghlan, CEO at credit reporting agency CreditorWatch, said it could take up to 12 months to see the full impact of the floods, but expects it will have a dramatic adverse effect on trade activity.
CreditorWatch expects insolvencies to dip as support packages for flood-affected areas are delivered and banks offer loan payment holidays to affected businesses.
"However, over time, as rejected insurance claims, losses from uninsured businesses and loss of income begin to be felt, this will unfortunately see insolvencies rise in those regions as well as the rest of Australia," it said.
