Reserve Bank Governor Philip Lowe has warned inflation is increasingly coming from within Australia, but he doesn't see a recession occurring at this stage.

He says the RBA still thinks inflation will hit 7 per cent this year, up from 5.1 per cent currently, but it is monitoring the situation.

Mr Lowe has also admitted the RBA suffered "reputational damage" when it tried to wind back its COVID-19 pandemic stimulus program.

Speaking on Tuesday at an event in Sydney, the RBA Governor said the share of items in the consumer price index (CPI) basket experiencing annual price increases greater than 3 per cent was at its highest level since 1990.

He said the RBA has had to adjust its forecasts higher for retail electricity and gas prices, given the problems with energy supply on Australia's eastern seaboard.

But he also couldn't see a sharp slowdown in economic activity occurring in coming years, from this vantage point. 

No recession, yet

"I don't see a recession on the horizon," Mr Lowe said.

"If the last two years has taught us anything, it's that you can't rule anything out. But our fundamentals are strong, the position of the household sector is strong, and firms are wanting to hire people at record rates.

"It doesn't feel like a precursor to a recession," he said.

Mr Lowe said current conditions were obviously challenging, but there were other positive things to say about the economy.

He said Australia's unemployment rate was the lowest in 50 years, the participation rate was at a record high, job vacancies were at record-high levels, and households had strong balance sheets.

Mr Lowe said the "terms of trade" — which compares the prices we receive for our exports against the prices we pay for imports — was at its highest-ever level.

"When we had the resources boom a decade ago I used to say, 'This is the highest since 1848, when we had the gold rushes in the British colonies' and, yet, here we are today, in 2022, having a higher terms of trade, which is really boosting our national income," he said.

"So there are a lot of positives."

Mr Lowe said interest rates had increased recently, but the cash rate was still less than 1 per cent, which is historically low.

He also said he did not think the unemployment rate needed to rise to get inflation back down to into the RBA's preferred 2-3 per cent range, but it was possible that it might rise at some point.

Inflation will take years to come down

However, he said, he did not think underlying inflation — currently 3.7 per cent — would return to the 2-3 per cent range for a couple of years.

"It's a couple of years away," Mr Lowe said. "But we have not yet done a full update of our forecasts following the May update.

"In the next month or so, we'll be doing a full forecast update, but it's going to be some years, I think, before inflation is back in the 2-3 per cent range."

He said he was travelling to Switzerland this week to meet other central bank governors, to talk about the world's inflation problems.

He said the RBA was walking a narrow path between trying to normalise interest rates, keeping inflation expectations low, and still supporting employment.

And he admitted the RBA had suffered some reputational damage recently.

RBA says it will review its communication strategy

Mr Lowe said the RBA's attempt to remove stimulus from the economy in late 2021 also ran into problems.

He said it was "disorderly and associated with bond market volatility and some dislocation in the market."

"This experience caused some reputational damage to the Bank," he said.

The RBA has released a paper explaining what occurred.