“Don’t mention the war,” Basil Fawlty famously warned, advice Jim Chalmers has never taken. Indeed, mentioning the war, or wars, has become his chief political strategy as he seeks to deflect attention from an all too obvious, homegrown inflation problem.
In 2023 Chalmers said, “we have an inflation problem because of a war in Ukraine”. In May 2024 he said on ABC’s Q&A program that “Russian aggression” was “one of the reasons we had this inflation spike”. The war in Ukraine has intensified greatly since then, but now “the war in the Middle East”, which has abated somewhat by comparison, has been the chief culprit this and last year.
“We have an inflation challenge in our economy not because unemployment is too low … a big driver of the inflation … comes from the Middle East,” the Treasurer insisted at a press conference on Wednesday, following release of the latest inflation figures.
Thankfully, even a cursory glance at Australia’s inflation performance over the past few years shows we had an inflation problem before these wars began, which has only become worse and more obviously self-inflicted ever since, relative to comparable nations.
The Reserve Bank put the cash rate up to a 15-year high of 4.6 per cent on Tuesday, not because CPI growth jumped to 4 per cent over the 12 months to August 31, but because underlying inflation remains at an internationally embarrassing 3.6 per cent. That’s the figure that strips out sudden movements in prices, including for petrol. It’s the figure the Reserve Bank cares about because it measures what’s happening among goods and services that are relatively unaffected by geopolitical events.
Underlying inflation was 3.7 per cent in the March quarter of 2022, as Vladimir Putin’s tanks rolled into Ukraine, and it was 3.3 per cent in January 2026, before the US and Iran began fighting. Even RBA governor Michele Bullock has had enough of the dissembling. “I want to make that clear. This isn’t all about the Middle East conflict,” she said at her press conference on Tuesday, singling out the nation’s woeful productivity performance.
In my new podcast The Prosperity Question released this week her predecessor, Philip Lowe, told me our outsized inflation readings were the result of “too much demand in the economy for supply and unit labour costs”.
“On top of that, we’ve got the higher oil prices,” he said. Oil prices, however, have affected prices in every nation, yet their underlying inflation levels are significantly lower than ours. Equivalent measures in the UK, the US, euro area, Canada and New Zealand have all have a two in front of them for practically all of this year, and a lot of last year too.
No wonder we have the highest official interest rate among practically all rich nations except tiny Iceland. Canada’s and New Zealand’s, perhaps the most relevant comparators, are only 2.75 per cent and 2.25 per cent, respectively.
The only war that’s pushed up Australia’s underlying inflation rate is the government’s war on the private sector. Government payments as a share of the economy are almost 27 per cent of GDP, implying that the federal government alone spends more than one in every four dollars in the economy. That’s the highest share outside Covid since the late 1980s.
All this has only been possible by injecting tens of billions of extra dollars into the economy. Chalmers has been crowing recently about a modest improvement in the so-called “underlying cash balance” in the federal budget. But the “headline balance”, which includes all the off-balance sheet spending related to climate change, student loan cuts, NBN and housing, is expected to exceed $64bn this financial year.
That’s almost twice the forecast underlying result. The inflationary impact of dollars spent doesn’t depend on the arcana of public financial accounting.
I haven’t even considered the impact of state-government borrowing, whose debts have soared to more than 40 per cent of the nation’s $1.7 trillion public-debt pile in the past few years.
In fairness, it isn’t only government causing inflation. Milton Friedman’s famous quip that “inflation was always and everywhere a monetary phenomenon” appears to have been completely forgotten. The money supply has been almost 8 per cent higher than a year ago every month this year practically, as banks churn out new loans like there’s no tomorrow, yet no one says a word.
It’s unlikely inflation will fall back to 2 per cent unless that changes. This newspaper’s economics correspondent, Matthew Cranston, asked the best question at this week’s RBA governor press conference, suggesting monetary policy wasn’t really very tough when the real official interest rate (the 4.6 per cent cash rate minus inflation) was only about 1.5 per cent.
Bullock said all the banks’ models were “telling us we think we’re a little bit … think we’re a bit restrictive”, apparently correcting herself mid-sentence. I think the first characterisation was more honest.
Piddling movements of the cash rate up or down by 25 basis points do next to nothing to affect real economic affairs. “Let me tell you honestly, we don’t really know if higher interest rates raise inflation or lower inflation,” Hoover Institution senior fellow John Cochrane told me earlier this year. “I can tell you, it’s not even a theory, it’s a story.”
Maybe Friedman was right after all.
