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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