Reserve Bank governor Philip Lowe has warned Russia's invasion of Ukraine will send a new wave of inflation around the world.
He has also warned the psychological impact of the fresh round of price rises could change peoples' expectations for how high inflation will be in the future.
He said this was a "critical issue" because, if people started to believe that prices would keep rising, it could challenge the ability for central banks to keep inflation under control.
"The war in Ukraine and the sanctions against Russia have created a new supply shock that is pushing prices up, especially for commodities," Dr Lowe said in a speech at the AFR Business Summit on Wednesday.
"This new supply shock will extend the period of inflation being above central banks’ targets.
"If so, the higher inflation would be more persistent and broad-based, and require a larger monetary policy response."
Dr Lowe said, at the moment, financial market pricing suggested that consumer price inflation (CPI) would decline from its current high rates in the North Atlantic economies to around 2 per cent without "real interest rates" ever going into positive territory.
"[But] a shift in inflation psychology would challenge this view, so this is a critical issue," he added.
Russia-Ukraine war supply shock
He said the Russia-Ukraine war had created a new "supply shock" by sending prices soaring for key commodities such as crude oil and gas.
Dr Lowe said, before the war, the world's supply chains had started to show signs that bottlenecks were easing, but now those plans had been thrown into disarray by new supply challenges due to the conflict and sanctions on Russia.
"Delivery times had shortened a bit, global car production was increasing again and the prices of semiconductors had come off their peaks," he said.
"Businesses were also responding with new investment and changes in processes to ease capacity constraints.
"These developments were providing a basis for expecting that supply-side inflation pressures would ease over time, both globally and here in Australia."
