It’s a circus, but no one is laughing. The mudslinging between the Reserve Bank, federal government, and unions has shown there is no appetite to fix, or worse, no fundamental appreciation of, Australia’s inflation problem. With condemnation now coming from all corners of the economy, the average punter has finally called the Treasurer’s bluff, writes Liam Garman.
Much to the chagrin of my peers in the investing world, in February, I called for the Reserve Bank to lift interest rates by 25 basis points, an additional two to three times over 2026. Aggregate demand was spread across all CPI groups, clearly supporting the RBA’s view that there was too much liquidity in the market.
The data was evident: for the past 12 months, Australia has been unceasingly hurtling towards higher inflation figures and, therefore, higher interest rates, with or without Trump’s War in Iran.
If you were to listen to Nero, I mean Treasurer Jim Chalmers, you would get the feeling that we are all too rich, businesses are too prosperous, and Australia is facing a 1970s-style OPEC fuel crisis. Those very individuals we have entrusted to steer the ship are fiddling while Australia burns and obfuscating the very real human impact of higher inflation.
Fuel, the crisis that never was
First things first: oil. Brent crude is only at a three-year high. Yes. The price of oil was more expensive in 2022. In fact, adjusted for inflation, Brent is 45 per cent cheaper than it was in 2008, meaning the Treasurer’s efforts to pin Australia’s inflation problem on oil prices really are little more than a distraction.
Free money for all!
Now onto housing policy. House prices have leapt 68 per cent since Labor formed government in 2022. Interest rates have hit their 15-year high, in the same time frame that the value of home loan debt doubled.
Australians really are poorer
Spare a thought for the nearly 300,000 young Australians holding 95 per cent mortgages. During a Property Buzz livestream earlier this year, Phil Tarrant and I somewhat prophetically noted that Australia’s private debt and government spending could leave us “one Middle East crisis” away from a multitrillion-dollar reduction in the value of Australia’s housing market, plunging young Australians across the country into negative equity.
And with borrowing for new first home buyer mortgages dropping by 20 per cent in a year, it is clear that young Australians are not exactly reaping the benefits of reduced asset prices.
It’s fixed income, stupid
But Australia’s inflation woes go beyond mortgagees. Spare a thought for pensioners and retirees living on fixed incomes from their superannuation, whose returns will be buffeted as equity markets stagnate, while an influx of Australians seeking government support in retirement could follow as mortgages and personal loans are carried into their final years alongside reduced annuity incomes.
Every indication it’ll get worse, so strap in
So, with unemployment up, business confidence plummeting, Australians poorer and businesses increasingly crowded out of capital markets by rampant government borrowing, where does that leave us when it comes to the latest inflation figures? Well, good news (not), it has gotten worse.
Electricity prices are up 13 per cent, building costs are up 5.4 per cent, and insurance, secondary education and car maintenance have jumped 5.6 per cent, 6.6 per cent and 6.2 per cent, respectively, all costs that no Australian can simply ignore.
If the RBA has to treat government expenditure as an exogenous input, perhaps it is time for the Treasurer to treat the war in Iran as exogenous, too.
And now, a cacophony of voices is finally calling out the federal government’s economic management, from the IMF urging the government to cut spending through to former Reserve Bank governor Philip Lowe and the region’s largest banks raising concerns about fiscal policy.
Even NSW Premier Chris Minns, months away from an election where One Nation looks poised to sweep seats across the historic Labor stronghold of the Hunter, has broken ranks with his federal colleagues, saying: “We have heard the advice from the RBA over the last two years that we need to be careful with public funds.”
The cannibalisation of the political left has not been confined to Labor, either, with Eastern Suburbs teal Allegra Spender also calling for means-tested benefits to reduce aggregate demand.
As the dust settles, it is becoming increasingly difficult to seriously blame everyone and everything except excessive government spending, particularly when the consequences are setting up a ticking time bomb for tomorrow’s taxpayer.
At the end of the day, the bond market is signalling that investors remain concerned about inflation, and if the government continues to spend at the same rate, lenders will demand higher returns to lend it more money.
While we concern ourselves with the immediacy of paying today’s mortgage or scaling tomorrow’s business, we risk leaving the next generation with an interest bill that forces austerity at precisely the moment the private sector is already being crowded out.
And that is the real danger: the government can continue to spend today, and we’re only starting to pay for it.
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