Hedge Clippings | 02 October 2026

Who's Fighting Inflation, and who's adding to it?

There are weeks when the economic tea leaves require careful interpretation, and then there are weeks when the Reserve Bank, the ABS and the Treasurer manage to lay them out in reasonably plain English.

This was one of the latter.

On Tuesday, the RBA unanimously increased the cash rate by another 25 basis points to 4.60%, its fourth increase this year and the highest cash rate in 15 years. The explanation was straightforward: inflation is too high, demand continues to exceed the economy's capacity to supply it, and financial conditions need to be tighter.

Then, just in case anyone thought the RBA was being unnecessarily gloomy, along came Wednesday's CPI figures.

Headline inflation jumped from 3.5% to 4.0% in the year to August. More importantly, trimmed mean inflation - which strips out some of the volatile movements - remained stubbornly stuck at 3.6% for the third consecutive month.

Both remain comfortably above the RBA's 2-3% target.

It's the war. Except when it isn't.

Treasurer Jim Chalmers was understandably keen to point towards events beyond Australia's shores.

Automotive fuel prices jumped 14.8% in August alone, driven by higher world oil prices and the unwinding of the remaining federal fuel-excise relief. Chalmers argued that the "overwhelming reason" headline inflation jumped from 3.5% to 4.0% was higher global oil prices, exacerbated by the Middle East conflict.

But it isn't quite the whole story, because Michele Bullock had been rather explicit the day before: "Inflation is too high and has been driven by domestic capacity pressures." The Middle East inflation shock, she added, comes on top of those domestic pressures.

Australia didn't suddenly develop an inflation problem when the latest Middle East conflict pushed oil above US$100. The RBA had already started raising rates because the economy was operating with excess demand.

Or, in the Governor's refreshingly uncomplicated description, "we are consuming more than we can supply as an economy."
Which rather brings us to the elephant in the Treasury room.

In 2018-19, the last full financial year before COVID, Australian Government cash payments were 24.6% of GDP, while the underlying cash deficit was effectively zero - just $0.7 billion.

For 2026-27, federal government payments are forecast at 26.8% of GDP, while the underlying cash deficit is forecast at about $31.5 billion, or 1.0% of GDP.

Before COVID, Canberra was therefore spending the equivalent of 24.6 cents in every dollar of GDP and had essentially balanced the budget. Today it is spending almost 27 cents, running a deficit which it is expected to do for the next 40 years.

Of course, not every dollar of government spending is inflationary. Productive infrastructure can increase capacity, while a deficit doesn't automatically cause inflation, but timing matters.

When the RBA says Australia is already consuming more than it can supply, and that both public and private demand are contributing, running government expenditure materially above its pre-COVID share of the economy becomes harder to dismiss as irrelevant.

Two feet on different pedals?

The RBA has one principal weapon against excess demand: interest rates.

Canberra has rather more.

Bullock was specifically asked whether public-sector spending was adding to aggregate demand. Her answer was yes - although she was careful not to allocate blame. Both public and private demand are contributing.

Chalmers counters that public demand growth is slowing. However, slowing government spending growth isn't the same thing as government spending falling.

The RBA is deliberately attempting to remove demand from the economy by increasing the cost of money. Meanwhile, governments continue to contribute to aggregate demand.

One arm of economic policy is pressing the brake while another still has a foot on the accelerator. Meanwhile, mortgage holders might reasonably wonder why theirs is the foot being asked to press harder.

And then there's productivity

Possibly Bullock's most important comment received rather less attention than the rate increase: "The bottom line is that productivity is doing nothing." That's the other half of the inflation equation. If demand is growing faster than supply, you can either reduce demand or increase the economy's ability to supply goods and services.

The RBA can only do the former.

Unfortunately, interest rates are a particularly blunt instrument. They don't reduce the world oil price, build houses or improve productivity. They do increase mortgage repayments, discourage investment, and persuade households to spend less.

The irony is that Chalmers and Bullock aren't actually contradicting each other as much as it might appear. The Treasurer is correct that the latest jump in headline inflation was overwhelmingly driven by fuel and energy. The Governor is equally clear that Australia's underlying inflation problem predates the latest oil shock and reflects an economy in which demand remains greater than supply.

The RBA has now raised rates four times this year and says it will increase them again if necessary. The question is who should carry the burden of fixing the problem. At the moment it's those with a mortgage, and if Bullock is to be taken at her word, they're soon to be joined by the swelling numbers of unemployed.

If public demand is admittedly one component of Australia's excess demand, how much of the inflation-fighting burden should continue to fall on mortgage holders and the unemployed, and how much should fiscal policy carry?

Or, to put it another way, while Michele Bullock has her foot firmly on the brake, and Jim Chalmers is keeping his foot on the accelerator, it's the rest of us who are left to foot the bill.

One scenario - or question - that will start to raise its head is whether the RBA's inflation target of 2.5% is realistic, even if Bullock envisages that reaching that goal is two years away, without a recession to achieve it?

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Hedge Clippings | 25 September 2026

Bond markets take most of the focus this week. The US 10-year Treasury yield pushed back to levels not seen since before the GFC, Australia's unemployment rate climbed to 4.6% despite employment increasing, and ASIC sharpened its warning to private credit managers. All of which sets up an interesting RBA meeting next Tuesday.

Five per cent wasn't the ceiling: The US 10-year keeps climbing

The US 10-year Treasury yield reached 5.20% on Thursday, its highest level since 2007, while the 30-year Treasury climbed to 5.48%, its highest since 2004. The move reflects a fairly uncomfortable combination of resilient US growth, inflation concerns, higher energy prices and government borrowing. It has also been part of a wider global bond sell-off rather than an isolated move in US markets.

The reason the 10-year matters is that it is one of the main reference points for the global cost of money. When investors can receive around 5% lending to the US government, borrowers elsewhere have to compete with it. Refinancing becomes more expensive and investors expect greater compensation for taking additional credit, liquidity, or duration risk. It is also worth remembering that the Federal Reserve doesn't directly control this end of the market. The Fed can set overnight rates; investors ultimately decide what they are prepared to accept to lend money to the US for ten or thirty years.

For most of the post-GFC period, markets became accustomed to unusually cheap money. That era is looking increasingly distant. Five per cent was supposed to be the scary number. The bond market seems to have decided it was more of a speed bump.

Yields at these levels are proving a headache for Donald Trump, adding to what was a difficult week for him. His man at the FED has just raised rates against his wishes, US debt now stands at US$40 trillion, and has increased by $2.5 trillion over the past 12 months. If, (and it's a big IF) he wins the upcoming mid-term elections, his promise of $5,000 per adult is estimated to add another $1.2 trillion to next year's figure, adding further upward pressure on bond rates and further juicing up inflation.

Elsewhere for Trump, his attempt to silence some of his media critics failed, firstly by a rare show of solidarity from his traditional media supporters, and then by the courts declaring his move unconstitutional. His rambling address to the UN General Assembly lasted almost 40 minutes (the average by his peers is around 15 minutes, and Albanese's earlier this morning lasted 19 minutes) focused on the war with Iran which he started, more than the war in Ukraine which he promised to stop. Both are driving global inflation, which will increase further if he follows through on his threat to limit US diesel exports.

ASIC tells private credit the clock is ticking

Private credit was back in the spotlight on Tuesday when ASIC Commissioner Simone Constant delivered the keynote address at CAFBA's Commercial Property & Development Finance Summit in Sydney. Her message wasn't particularly subtle: the "clock is ticking".

Constant said ASIC is beginning to see the first significant cracks emerge as weaknesses in parts of the sector are tested under tougher conditions. Bathla is the obvious recent example, with 40 private credit funds reportedly exposed to the failed developer to the tune of 3.4bn.

ASIC's concerns go considerably further than one borrower. Its review of 28 private credit funds found only four published information about the interest rates or ranges charged to borrowers, fewer than half had detailed written credit, impairment and default-management policies, and only two of the wholesale funds conducted stress testing as part of liquidity-risk management. For a sector ASIC estimates has grown around 500% over the past decade, the regulator's view is that governance, controls and underwriting standards haven't always kept pace. Constant described it rather neatly: parts of the sector have tried to "run before it could walk".

Bathla also demonstrates why treating private credit as one homogeneous investment strategy isn't particularly useful. Concentrated lending to a property developer carries very different risks from diversified residential mortgages, corporate lending, medical finance or other asset-backed credit. The label tells you the broad sector, but not the underlying asset class. The loan book - if you can see it - tells you where the risk actually is.

Unfortunately, and unhelpfully, the "private credit" label is being used too widely when not all private credit is the same, nor represents the same risk, even though ASIC's general warnings about reporting, valuations, terms and fee transparency are real.

Australia added jobs and unemployment still rose. Both can be true.

Australia added 39,500 jobs in August, almost twice market expectations, but unemployment still rose from 4.5% to 4.6%. The apparent contradiction is mostly explained by more Australians entering the labour force. Participation increased to 67.1%, meaning employment rose but not quickly enough to absorb everyone looking for work.

There was some softness underneath the headline number. Part-time employment rose by 45,800 while full-time employment fell by 6,300. On the other hand, hours worked increased 0.7%, and underemployment edged down to 6.2%. So the labour market is loosening, but it is hardly falling off a cliff.

Which leaves the RBA with a problem. The Board meets for 2 days on Monday, with its rate decision due at 2.30pm on Tuesday. The cash rate currently sits at 4.35%, while inflation remains stubbornly above the RBA's 2-3% target and Governor Michele Bullock has warned that some further upside inflation risks appear to be materialising.

The Board therefore has evidence of a gradually cooling labour market on one side, and persistent inflation, elevated energy prices and rising global borrowing costs on the other. There is one more complication: the ABS releases the August 2026 CPI at 11.30am next Wednesday, less than a day after the RBA announces its decision. Nothing like making the rate call on Tuesday, and getting the inflation update on Wednesday.

As usual, the explanation for the decision may prove just as interesting as the decision itself. With almost 100% of the market, and all the major banks expecting a hike of 0.25%, it is unlikely there will be any surprises, just further pain for borrowers, and pressure on the real estate market.

No doubt Jim Chalmers, and Albo on his return from the UN, will have plenty of reasons to deny any responsibility.

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Hedge Clippings | 18 September 2026

Higher for Longer, Whether We Like It or Not

If anyone was still hoping the world's central banks might declare victory over inflation and return interest rates to the comfort zone of the past decade, this week provided another fairly convincing reason to think again.

The US Federal Reserve unanimously increased its target rate by 25 basis points to 3.75-4.00%, its first increase since 2023, with new Chairman Kevin Warsh making it clear that inflation, rather than keeping the occupant of the White House happy, remains the priority. The Fed said inflation remains elevated and that the increase would support a "timelier return" to its 2% target.

Donald Trump, predictably, wasn't impressed. He took to social media to announce that US interest rates should be "1%, or less", although notably spared Warsh the sort of personal criticism regularly directed at his predecessor Jerome Powell. Trump subsequently confirmed he retained confidence in his appointee. Perhaps appointing the Fed Chairman is one thing; getting him to do what you want once he's there is another.

The bond market seems equally unconvinced that cheap money is just around the corner. The US 10-year Treasury yield reached 5% this week, a useful reminder that central banks only control one end of the yield curve.

On this side of the Pacific, the RBA faces much the same problem, albeit with an Australian flavour.

Governor Michele Bullock appeared before the House of Representatives Standing Committee on Economics in Canberra today and didn't leave much doubt about what is keeping the Monetary Policy Board awake at night. Inflation has fallen dramatically from its 7.9% peak at the end of 2022, but after briefly returning to the 2-3% target band, it accelerated again during the second half of 2025. Headline and underlying inflation have been running at around, or slightly above, 3½%.

More importantly, the RBA doesn't think the problem is going away quickly.

The Bank has already increased rates by 75 basis points this year, while its August forecasts didn't have inflation returning to around the midpoint of the target range until late 2027. Since then, according to Bullock, some of the upside risks the RBA was worried about appear to be materialising.

And therein lies the problem.

Nor, of course, is inflation simply an Australian or American problem. It is global, helped along, once again, by that man in the White House. Trump's tariffs have added to international cost pressures and uncertainty, while the Middle East conflict and the resulting surge in energy prices have provided another inflationary shock. Brent crude above US$100 a barrel is hardly confined to the bowsers of Sydney or Los Angeles; it flows through transport, manufacturing, agriculture and ultimately consumer prices across the world.

For evidence, look no further than Japan. The Bank of Japan today joined the tightening cycle with a 25 basis point increase of its own, taking its policy rate from 1.0% to 1.25%, its highest level in 31 years. The contrast is interesting: Japan is fighting many of the same global inflationary pressures as the US and Australia, but doing so with interest rates starting at just 1%, rather than the 3-4% territory confronting American and Australian borrowers.

Japan also illustrates how interconnected the problem has become. Higher US rates can weaken the yen, making imported oil and other goods more expensive for Japan and adding still more inflationary pressure. Throw in Trump's tariffs, the Middle East conflict and US$100-plus oil, and central bankers from Washington to Tokyo to Martin Place are increasingly fighting different versions of the same inflationary fire.

The ongoing Middle East conflict has pushed oil back above US$100 a barrel, feeding directly into petrol prices and indirectly into virtually everything that needs to be manufactured, transported or delivered. Businesses are increasingly passing those higher input costs on to consumers.

At the same time, the global AI investment boom is creating its own supply constraints and price pressures, while domestically the labour market remains relatively tight. Unemployment at 4.5% might have risen, but by historical standards it remains low, while the proportion of Australians with a job remains close to record levels.

So the RBA is faced with an uncomfortable balancing act.

Growth is slowing. Household spending is moderating. Housing prices have fallen in most capital cities, and new housing lending has tanked, thanks to the changes announced in the May budget. Higher mortgage rates are yet to work fully through household budgets because, as the RBA continually reminds us, monetary policy operates with a lag.

Yet inflation remains too high.

Even more interesting was Bullock's acknowledgement of the impact falling property prices can have on the wider economy. Lower household wealth can reduce consumption, falling turnover means fewer purchases of furniture and appliances, while weaker prices can reduce the incentive for residential construction.

In other words, lower house prices aren't simply painful for homeowners; they become part of the mechanism through which higher interest rates slow the economy.

That leaves the Monetary Policy Board with an unenviable decision when it meets later this month. Markets are pricing a September increase as the base case, although not quite the unanimous certainty some commentary suggests; recent market pricing has put the probability at roughly three-quarters.

Complicating matters further, the Board will make its decision before receiving the August CPI figures which are not due until 30th September, the day after the RBA's announcement.

Unless something changes dramatically between now and then, the RBA's hand is close to being forced.

With oil above US$100, businesses passing higher costs through, underlying inflation still around 3½%, and the world's largest central bank having just raised rates itself, sitting on the sidelines becomes increasingly difficult to justify.

The irony, of course, is that the fourth Australian rate rise of 2026 may arrive just as the cumulative effect of the first three is starting to bite.

That's the problem with monetary policy. Central banks drive by looking through the rear-view mirror, while steering an economy that reacts with a considerable delay.

Sometimes they don't know if they've hit the brakes too hard until we're all already through the windscreen.

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