Rates at 4.6%: Why Sticky Inflation Has Canberra Cornered
The Reserve Bank has lifted the cash rate to 4.6%, a 15-year high, and Governor Michele Bullock has warned more hikes could come soon. The Guardian
Headline inflation, the everyday rise in prices across the economy, reached 4% in the year to August, up from 3.5%. Trimmed mean inflation, the underlying measure that strips out wild price swings and which the Bank watches most closely, held at 3.6% for a third month, above the Bank's 2-to-3% target band. Unemployment has climbed to a near five-year high.
In my view, that combination is ugly. Prices are speeding up while the labour market softens. It leaves the Bank raising rates into weakness, and it leaves the government without an easy story to tell.
In July, the Bank released research that found only 25% of respondents could correctly explain that higher interest rates would ultimately lead to lower inflation. More than half believed higher rates would push up costs in the economy.
The broader context here is the Bank has a hard sell. Most people do not accept that higher rates bring inflation down. That makes each hike politically harder to land.
Prices up, jobs softening
The broader context here is Canberra reads these numbers in a set order. Headline at 4% gives the shock. Trimmed mean at 3.6% gives the persistence. Unemployment at a near five-year high removes the old defence that strong jobs justify the pain.
Mortgage holders feel the cash rate first. Renters and shoppers feel headline inflation second. The press gallery and Treasury watch the trimmed mean, because it decides what Bullock does next. Right now all three point the same way.
Canberra's blame game
Prime Minister Anthony Albanese and Treasurer Jim Chalmers blame Donald Trump's war in Iran and the resulting global fuel shock for the inflation pressures. Bullock blames excess demand from government spending. Fuel prices and Middle East disruption, she says, are in addition to domestic problems.
In my view, that is the fight. The government says global. The Bank is reading the figures as homegrown as well.
Chalmers told an Australian Public Policy Institute summit that Australia's economic challenges were not exclusively global, but right now they are primarily global. He says real federal spending growth averaged 2% a year under Labor, or 4.2% a year excluding 2022-2023, compared with 2.6% under the Coalition in the six years before the pandemic. New South Wales Premier Chris Minns says his government has controlled spending, including through pursuing offsets to balance the cost of new programs.
The broader context here is neither side can afford to lose this argument. If voters accept the shock is imported, Labor gets patience. If they accept Bullock's version that Canberra spent too much, Labor owns the mortgage pain. The July research suggests most voters start sceptical that hikes work at all, which makes the politics more volatile, not less.
Labor has quietly established a razor gang to drive savings in the NDIS. The program costs $50 billion and is on track to cost $63 billion by 2028-29.
Looking at what this means for the budget, that is where the spending debate gets concrete. It is not abstract excess demand. It is disability spending, state offsets, and which minister takes the hit.
In my view, that also explains why every Labor premier is now talking like Minns. Offsets are the language of innocence. No new money without old money found elsewhere. Whether the Bank buys it is another question.
Houses are doing the work
House prices fell for a sixth consecutive month after changes to make negative gearing, the tax break for loss-making investment properties, and capital gains tax less generous. Higher borrowing costs and weaker investor demand dragged down prices in mid-2026, according to mid-year market analysis. Bloomberg
In the week to 13 August, the banks reported depressed housing market sentiment and cautious outlooks, which dragged down their share prices. Bloomberg As of 9 September, prices of the most expensive homes had dropped more than 10% in the two major markets, a fall that widened the divide between premium and cheaper homes. Bloomberg
In my view, this is the transmission mechanism, the way rate rises bite through housing, that Canberra pretends is painless. It is not. Investors step back first. Top-end Sydney and Melbourne correct fast. Mortgage holders in the outer suburbs pay more each month while their equity thins. Six months of falls tells staffers the tightening is working. It also tells them who is wearing it.
Angus Taylor leads the opposition. David Shoebridge leads the Greens, and is wooing angry voters unsettled by rates and prices. ABC Almost 4.7 million Victorians are expected to vote in the 2026 state election. ABC
The broader context here is Labor staff will read that Victorian enrolment figure twice. Hip-pocket elections are fought in mortgage belts. A 4.6% cash rate with a warning of more to come is not background noise there. It is the campaign.
