While RBA governor Philip Lowe stopped short of accusing businesses of gouging under the cover of inflation, he told a parliamentary committee elevated profit margins could become a major contributor to inflation.
Dr Lowe said there were three broad drivers of inflation - higher input prices, higher wages and higher profit margins.
"Today, (inflation) is largely from higher input costs," he told a House of Representatives economics committee on Friday.
"There's some pickup in wages but that's not driving inflation - and I think in some industries there has been an increase in margins."
Dr Lowe said it was not surprising firms were keeping prices high in current conditions.
"...many firms say to me they want more workers, they don't want more customers at the moment," he said.
"And when that's your mindset, you've got to push your margins up. It would be kind of strange if you didn't."
However, he said that process shouldn't go too far.
"I don't think it has at the moment, but it's just kind of sounding a warning," he said.
Dr Lowe said wages would have to remain subdued to avoid a wage-price cycle in which high inflation leads to higher wages that subsequently drive higher inflation.
"This type of cycle would lead to higher interest rates, a weaker economy and higher unemployment," he said.
"Businesses do have a role in avoiding these damaging outcomes by not using the higher inflation as a cover for an increase in their profit margins."
Dr Lowe said the troubles facing the global economy made it harder for the Reserve Bank to navigate a soft landing for the Australian economy.
He said higher-than-expected inflation figures in the United States and deteriorating economic conditions in Europe and China made it difficult to return inflation to the two to three per cent target and keep the economy on an "even keel".
"I think it is possible to achieve this but the path here is a narrow one and it's clouded in uncertainty," he said.
Dr Lowe used his opening speech to address concerns about the RBA's response to pandemic-era challenges.
"In those dark days of the pandemic, the Reserve Bank board judged that the bigger policy mistake would have been to do too little rather than too much," he said.
"If the worst had occurred, Australians would have paid a heavy price."
Dr Lowe defended the bank's earlier commitment to low interest rates until 2024.
"I'm frequently reminded that many people interpreted our previous communication as a promise or as a commitment that interest rates would not increase until 2024 - this was despite our statements on interest rates always being conditional on the state of the economy," he said.
Future cash rate decisions would depend on inflation expectations and how general inflation psychology evolved in Australia, he said.
Since May, the RBA has lifted its cash rate target from 0.1 per cent to 2.35 per cent, which has added more than $600 a month to the average mortgage holder's monthly repayments.
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