Inflation needs spending curbs

Trimmed mean inflation, the Reserve Bank’s preferred underlying inflation gauge, which strips out items with more volatile prices, was 3.5 per cent in the 12 months to September. That figure was encouraging, well down from 4 per cent in the 12 months to June.

But mortgage holders looking for an interest-rate cut are likely to have to wait until the RBA’s first board meeting next year, in mid-February, for any relief.

Governor Michele Bullock consistently has said the central bank will ignore the reduction in headline inflation – such as significantly lower power prices as a result of government electricity rebates – and focus on persistent underlying price measures. Services inflation, for example, accelerated 4.6 per cent in the year to September because of higher insurance costs, childcare fees, medical and dental costs, and rents.

Jim Chalmers, eager to highlight good economic news, has welcomed the 2.8 per cent headline inflation rate, the lowest in almost four years. It showed the economy was “on track” for a soft landing. That is good news for employment.

But the time length and complexity of the inflation fight should convince government members eager to step up populist cost-of-living relief measures that doing so would not be in the interests of potential recipients, to whom an interest-rate cut would be more valuable.

Some federal MPs and union leaders want Anthony Albanese and the Treasurer to replicate Queensland Labor leader Steven Miles’s pre-election strategy of widespread, simplistic sweeteners such as 50c public transport fares and a $1000 electricity rebate, all non-means-tested. Although the Miles government was booted from office with a 7 per cent swing, anxious federal MPs believe the approach saved at least some of the furniture. On Sunday, one federal MP said the Prime Minister should ensure national cabinet adopted a Queensland-style heavily subsidised public transport policy across the nation.

Another claimed voters wanted to hear about “free lunches, free transport and free Medicare”, while a third MP said Mr Miles’s cost-of-living policies were easily digestible and identifiable. They were also unaffordable in a state with rising debt and interest payments and a AA+ credit rating under threat. As economists warned, resorting to populist spending would be counter-productive for the Albanese government and for Australians with mortgages.

KPMG chief economist Brendan Rynne said the best thing the government could do was to sit on its hands, let the market take its course and allow interest rates to fall. That would help more households through mortgage payments and also take some heat out of the rental market.

Dr Chalmers sensibly rejected the MPs’ push for populist government largesse, insisting the federal election was not going to be a “free-for-all of public spending”. He is right to take credit for the impact of back-to-back surpluses on reduced inflation. But with underlying inflation still well above the RBA’s target zone, Dr Chalmers must resist pressure from MPs to loosen the purse strings.