EDITORIAL: The honeymoon is over as interest rate rise looms

So the honeymoon was short and it’s over.

It doesn’t feel like so long ago that the Reserve Bank of Australia handed out the last of its three interest rate cuts last year.

But those who let out a sigh of relief when they counted the savings on their mortgage repayments last year are surely already tensing their jaws at the prospect that rates are about to go back the other way.

That’s the inescapable conclusion from the data released on Wednesday, which showed headline inflation at the end of last year accelerated to 3.8 per cent, up from the 3.4 per cent pace in the year to November 30 and above market forecasts of a 3.6 per cent increase.

This annual consumer price index number has been above the RBA’s 2-3 per cent target for five straight months, sparking universal fears interest rates will go up again next week for the first time since November 2023.

Even without volatile items — like power prices, petrol, fruit and vegetables and holiday accommodation costs — underlying inflation was also on the high side. The trimmed mean, the Reserve Bank’s preferred measure of inflation, climbed by 3.3 per cent over the year.

The key drivers were housing costs, up 5.5 per cent annually, followed by food inflation, up 3.4 per cent, and recreation and culture — up 4.4 per cent.

But Treasurer Jim Chalmers did his best version of a London “Bobby” telling rubberneckers at a crime scene to move along because there was “nothing to see here”.

Dr Chalmers said there was no evidence to suggest public spending or the Government’s first home buyer scheme — widely credited with driving up demand and therefore prices — was a major factor.

He was surely doing his best to keep a straight face as he rolled that out.

Some of the other issues in the discussion have been widely canvassed. Migration putting more people in the hunt for already under-supplied housing, driving up prices; a tight labour market driving up costs — and yet also a need for more skilled migrants — and the ongoing struggle to boost productivity.

To take a wider view, it is hard to escape the idea that since COVID, Australia has struggled to put the traditional economy back together or work out how to cope with the rapid changes brought about by AI, which has the potential to change just about every corner of life.

We asked AI how Australia brings down inflation. The answer: “Through a combination of monetary policy managed by the Reserve Bank of Australia and fiscal policy implemented by the Federal Government”.

We asked how should the Government use fiscal policy to bring down inflation? The answer included through supply-side and regulatory measures, targeted cost-of-living relief (Dear AI, they tried that sugar hit with electricity), and “spending restraint and Budget repair”.

And this gem: “Contractionary fiscal policy to bring down inflation by managing its Budget to reduce overall demand and lower business costs”.

Thanks AI. Who would have guessed!

Responsibility for the editorial comment is taken by Editor-in-Chief Christopher Dore.