Inflation on the Rise: A Recipe for Disaster
Inflation is heading in the wrong direction, and it’s happening at a particularly bad time. Australia’s September quarter CPI data revealed that inflation rose by 1 percent over the quarter, exceeding the RBA’s expected 0.6 percent rise. This means that homeowners and struggling businesses won’t get the relief they need, and interest rate cuts are off the table.
The Culprit: Out-of-Control Spending
So, who’s to blame for this mess? Treasurer Jim Chalmers is the main culprit. By failing to tackle out-of exemptions and uncontrollable spending, he’s contributing to inflationary pressures. The latest economic figures show that much of Australia’s recent growth is coming from government spending, but the budget outlook shows bigger deficits ahead. This means that while the Reserve Bank is trying to slow the economy to curb inflation, the government is still pumping money into it, working against what the RBA is trying to do.
The Double Disaster
Inflation rising while unemployment is also going up is diabolical double act, especially when economic growth numbers are subpar. It adds up to an RBA unable to cut rates to support a weakening economy without fueling unwanted inflation. That’s how recessions happen. Headline prices rose 1.3 percent over the quarter and 3.2 percent over the year. More importantly, the trimmed mean ticked back up to 3 percent year-on-year, thanks to the latest quarterly results.
Energy Price Rises: The Other Culprit
Drilling into the monthly detail, another culprit leaps off the page: energy price rises. Electricity prices are up a staggering 34 percent over the past year, with gas prices also higher. It’s hard to decouple rising energy costs from emissions targets. The RBA warned that the unwinding of government electricity rebates would lift measured inflation in the second half of this year, which is exactly what’s happened.
The Broader Economy: An Ugly Mix
Set against what’s happening across the broader economy, and the mix is ugly. Unemployment has risen to 4.5 percent, the highest since 2021. Consumer sentiment slid again this month, deep into pessimistic territory. Households are feeling the squeeze. The latest economic figures show that much of Australia’s recent growth is coming from government spending. But the budget outlook shows bigger deficits ahead.
Chalmers’ Budget Strategy: A Car with the Brake and Accelerator Pressed
The government’s budget strategy is equivalent to driving a car with the brake and accelerator pressed at the same time. While the Reserve Bank is trying to slow the economy to curb inflation, the government is still pumping money into it, working against what the RBA is trying to do. Clearly, the inflation fight isn’t over. Core inflation is sticky, energy prices keep surging, and upward pressure remains.
A Recipe for Recession
Real wage gains that looked within reach mid-year now risk being eroded again by higher-than-ideal inflation. The RBA has cut rates three times this year, following a dozen hikes in its bid to get inflation under control. This new data will only make the board more cautious – and less likely to cut again anytime soon, unless economic weakness forces its hand despite the inflation numbers. Politically, Labor owns the cost-of-living story – whether it likes it or not.
Conclusion
What should happen from here is dull but necessary. Fiscal policy needs to do less, monetary policy needs to sit tight, and Labor needs to get serious about addressing supply-side constraints. None of that is headline-grabbing, but it’s how you grind inflation back down – without grinding the economy to a halt. The Opposition should be jumping on the government’s lack of a plan, rather than focusing on trivial matters. Perhaps the only factor avoiding a recession is high rates of immigration, growing the pie sufficiently to avoid a technical recession, even if everyone’s slice of the pie keeps shrinking.
