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Australia's headline inflation rose to 4 per cent in the year to August while the Reserve Bank lifted the cash rate to 4.6 per cent, heaping political pressure on Treasurer Jim Chalmers and Prime Minister Anthony Albanese.
Headline inflation rose to 4 per cent in the year to August, up from 3.5 per cent, while the Reserve Bank lifted the cash rate to 4.6 per cent this week, the highest level in 15 years.
Annual underlying inflation, or the trimmed mean, held steady at 3.6 per cent for a third month. Reserve Bank Governor Michele Bullock warned that more rate rises are possible. She said inflation is too high and has been driven by domestic capacity pressures. Asked about productivity, she was blunt: Productivity is doing nothing.
Inflation and Productivity Test
On the morning after last year's landslide Labor election win, Jim Chalmers declared a shift in priorities for the government's second term. He told Insiders that the first term was primarily inflation without forgetting productivity, and the second term would be primarily productivity without forgetting inflation. At the midway point of this term, the scorecard on both is grim.
Both the treasurer and prime minister have spent the week on the defensive, highlighting efforts to tackle inflation and kickstart productivity while pinning blame on the war in the Middle East. The monthly numbers for August told a slightly better story, with both headline and underlying inflation for the month coming down. Chalmers felt vindicated, arguing the data backed his claim that the Iran war was the chief driver of the recent inflation spike.
Bullock had described the war as coming in addition to the existing problem at home, taking the air out of his argument that global disruption from the strait of Hormuz was to blame. On Wednesday, the treasurer was asked by media if he was gaslighting voters. Challenged over Labor's big spending agenda, Chalmers insisted government spending was coming down, though he conceded there was more work they could do.
Budget Support Faces Structural Deficit
Anthony Albanese flagged more cost-of-living support measures would be announced in the mid-year budget update in December. That would be on top of spending on free TAFE, free visits to the GP, cheaper medicines and student debt relief. The government insists it has found room for the extra spending through cuts elsewhere, but the budget remains stuck in a structural deficit. The temptation to offer even more household relief and more tax cuts before the next election will be strong.
Last week, unemployment climbed to a near five-year high. Already changes to negative gearing and capital gains tax are cooling the housing market, meaning homeowners will have to pay more for their mortgages at the same time as the value of their home drops. Demand for more cost-of-living assistance comes with a big price tag and would do little to turn around inflation.
Labor wants to deliver on election promises, including tax cuts and increased spending on childcare, TAFE courses and improved Medicare services. Cuts to health or social services would break faith with Labor voters, some of whom are angry at $40bn in cuts to the NDIS. One Nation is already feeding on the grievances of frustrated voters on the right.
Economic Pressure Shapes Political Landscape
Pauline Hanson's ability to reflect voters' grievances and disillusionment back to them is unrivalled, and nothing is more powerful for protest parties than sustained economic pain for households. Opposition Leader Peter Dutton can improve the Coalition's standing off the back of Labor's woes. This week he attacked Chalmers for not understanding business or the economy, but then refused to acknowledge any international effect at all on inflation, including the Iran war.
A new Greens leader has emerged on the left with an energetic and overwhelming focus on the cost of living. After defeating Mehreen Faruqi and Sarah Hanson-Young, David Shoebridge said things have got harder, much, much harder, for ordinary Australians. He said the Greens are not here to make the Labor Party any better, adding: The Greens are here to replace them.
Shoebridge's focus on the plight of stressed younger Australians and his determination to blame Labor for their woes presents a new layer of difficulty for the government. Some Labor MPs have already spoken privately about their concerns on the government's economic message, urging Albanese and Chalmers to take on serious reform and do more to help small business. If Labor is to avoid another malaise like the one that followed the voice referendum, turning the tide on inflation is essential.
Restoring the party's position in the polls will be harder than last time, with sustained interest rate rises sure to prompt a slow political death. Halfway through the term, it is clear neither objective is where the government wants it to be, even if it can point with some justification to factors beyond its control. As political pressure mounts from both the left and right, the risk is that pursuing more short-term relief will only make the long-term challenge harder.
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abcnews:This story was compiled and edited by the HeadTopics newsroom and HT AI from the reports above.
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