Inflation spike comes with painful consequences for borrowers

It’s no comfort to home and small business borrowers hoping for interest rate cuts and those struggling to pay power bills, but Jim Chalmers was correct on Wednesday when he said energy rebates were “not a permanent feature of our budgets”. The Australian has made the same point. Federal and state governments have squandered the nation’s former comparative advantage of plentiful and affordable energy, and while hard-pressed consumers will feel the pain when the handouts cease, the Treasurer must be prepared to hold the line.
Taxpayers cannot indefinitely subsidise power bills to insulate the government from political backlash.

Headline inflation hit 3.8 per cent in October, driven largely by a 37.1 per cent increase in electricity prices. Housing costs rose 5.9 per cent; costs for food and non-alcoholic drinks, and recreation and culture costs, rose 3.2 per cent. Underlying inflation, the key figure taken into account by the Reserve Bank board in setting interest rates, reached 3.3 per cent – well outside the central bank’s target range. The spike prompted Commonwealth Bank chief economist Luke Yeaman, among others, to warn that the RBA could lift rates in the new year if price pressures remained stubborn and the labour market tightened: “We will continue to run close to the economy’s speed limit so the RBA board will constantly be on edge and rate cuts will remain off the agenda.” Mr Yeaman previously led Treasury’s macro forecasting unit.

Government spending and growing deficits are also a concern. After recording a $10bn deficit for the 2024-25 financial year, the Albanese government is seeking much-needed savings of 5 per cent from government departments. But as Matthew Cranston reports, the head of the RBA’s international department, Penelope Smith, has warned the growing deficit could lead to the bank changing its thinking on what interest rate would be required to keep growth and inflation from overheating. In a speech to the Australian Securitisation Conference, Ms Smith said government bottom lines had an impact on interest rates.

The International Monetary Fund and the OECD also have warned about the need for greater fiscal discipline. And as opposition Treasury spokesman Ted O’Brien says, Labor’s spending is causing greater reliance on bracket creep to increase the proportion of government revenue contributed by personal income tax payers.

That inflation is being driven by rising power prices will refocus attention on renewable energy costs and Climate Change and Energy Minister Chris Bowen’s joint role as COP31 negotiations president. The minister has stressed that the role is part-time but he has been unable to say in question time this week how many sitting days of parliament he would miss and the cost to taxpayers.

The rise in power prices is also a reminder that large sections of the nation’s community have lost sight of the importance of developing gas resources. After almost 20 years of delays caused by regulations and green lawfare, Eric Johnston reports, Santos’s Narrabri gas project is facing a new hurdle with NSW farmers threatening legal action in a bid to force the state and federal governments to dump it. As NSW Premier Chris Minns says, the project is “ incredibly important for our state” and could provide “half our gas needs in NSW”. The project’s demise or longer delays will exacerbate energy prices and inflation, and therefore interest rates, impeding productivity and living standards.

Resistance to such developments and reliance on taxpayers to pay for everything from childcare to more HECS debts, health, aged care and National Disability Insurance Scheme services comes at a price – inflation, higher interest rates and higher tax. So does Labor’s expansion of the public service by 24.7 per cent to almost 200,000 workers. Those uncomfortable lessons are evident in the latest inflation rate and its consequences.