Chalmers denies government spending is driving inflation as interest rate rise tipped

Treasurer Jim Chalmers has rejected claims his government’s spending is driving inflation, as millions of Australians brace for a possible interest rate rise later on Tuesday.

The Reserve Bank is set to hand down its first rate decision of the year, with economists tipping a 25 basis point hike, marking the first increase in more than two years.

WATCH THE VIDEO ABOVE: Reserve Bank rate hike looms amid inflation debate with Jim Chalmers.

The prospect of higher rates has ignited political debate over so-called “Jimflation,” with critics accusing the Treasurer of fuelling price pressures through continued government spending.

On Sunrise on Tuesday, Chalmers said there were other reasons for the rise in inflation.

“There’s not a unanimous view amongst the economists about what’s driving the most recent tick up in inflation,” he said.

“If you look at the facts, that tick up in the most recent data was largely about holiday spending, the withdrawal of the energy rebates, and some more persistent issues in housing.”

The treasurer acknowledged inflation remains a challenge for households, but said the government was responding with targeted relief while repairing the budget.

“There’s some temporary issues, some permanent or persistent issues, when it comes to our inflation challenge,” he said.

“We acknowledge that we’ve got this challenge in our economy. We know that people are under pressure, we more than acknowledge that, we’re rolling out cost-of-living help, we’re repairing the budget because we know that even though the budget is not the primary determinant of prices in our economy, governments can play a helpful role, and that’s our focus.”

Australia’s inflation rate now sits above that of the UK, US, Germany, Japan, Canada, and France, but Chalmers said broader economic conditions must also be considered.

“You’ve got to make the whole comparison,” he said.

“We’ve got lower unemployment than most of those countries. We’ve got faster economic growth than all of those countries except for the US. We’ve got a much better budget than those countries in the G7.”

Chalmers stood by comments made last year that the worst of inflation is behind Australia, despite renewed pressure on mortgage holders.

“The worst of the inflation challenge was in 2022,” he said. “We came to office, inflation had a six in front of it and was absolutely galloping.”

“That’s not to dismiss the very real pressures that people are confronting right now.”

While the Treasurer insisted government policy is not the primary driver of inflation, economists say the Reserve Bank has little room to move.

HSBC chief economist Paul Bloxham told Sunrise on Tuesday rising inflation has left the RBA with few alternatives but to raise interest rates.

“I think the RBA will be lifting its cash rate today by 25 basis points,” Bloxham said.

“I don’t think there are a lot of options here. Inflation has risen, it’s surprised them to the upside, it’s above their target.”

Bloxham said the economy remains in an upswing, with a tight labour market making it difficult to cool inflation without monetary tightening.

“It’s hard to see inflation coming down enough without the RBA putting the foot on the brakes a little bit,” he said.

The RBA will hand down its decision on interest rates at 2:30pm on Tuesday.