Will Labor look to a rate cut or throw caution and money to the wind?

Jim Chalmers on Thursday. Picture: NewsWire / Aaron Francis

Jim Chalmers might have resisted the temptation to proclaim his own beautiful set of numbers as headline inflation returned to within the central bank’s target band for the first time in three years.

But the Treasurer is rapidly approaching a Hobson’s choice moment.

This choice will be whether Labor opts to bet its campaign strategy on a pre-election rate cut with little on offer to voters through cautious spending, or gives up on mortgage relief in favour of a looser approach to trying to buy itself seats.

Both options have political upside as well as risk. But this is a situation the government has conspired to produce. Had it done more work earlier on the inflation front, it may not be now as wedged as it is.

There was little surprise in Wednesday’s quarterly CPI figures. They were broadly in line with expectations.

Chalmers has achieved his budget pledge of returning headline inflation to within the 2-3 per cent band before Christmas.

But as the RBA has consistently reminded people, and the government, its focus is on the underlying numbers which while down, are still above target at 3.5 per cent.

Without the billions spent by commonwealth and state governments, the headline inflation would be closer to 3.5 per cent.

As a result, most economists believe there is little chance of a rate cut before the end of the year.

At best, February would be a possibility, but much of this would depend on not only the domestic but global trend continuing.

If no rate cut materialises in February, this leaves one RBA meeting – April 1 – before the election, assuming Anthony Albanese goes full term and holds the election on May 17.

The May RBA meeting isn’t until May 20.

The April meeting will come a week after the scheduled budget. If Chalmers’ strategy is to deliver a rate cut before the election, then everything rides on this.

The RBA will be looking over the government’s shoulder from now until then, with a hawk eye on the balance sheet and MYEFO spending pledges.

Chalmers insistence of low spending approach suggests he is wedded to the former strategy – securing a rate cut before the election. This would deliver Labor a significant pre-election dividend it were to happen.

And of course there are no guarantees. There is considerable pressure from Chalmers’ colleagues to forget about a rate cut, as it might not happen anyway, and throw money at the election.

That pressure will accelerate the more the Albanese government’s political fortunes decline. And at the moment there is no sign this will be arrested.

The likelihood of an election earlier than May only accelerates from here, if mortgagees are not the primary electoral concern for Labor.

Chalmers will have to take an aggressive Keating-like approach within government to resist this approach. Unless of course he has already signed up to it himself.

As economist Chris Richardson points out, it is times like this when the independence of the central bank is crucial.

With inflation still a problem and an election around the corner, the RBA’s role comes into sharper focus.

It will be watching every cent that comes out of MYEFO in December, and if there is any sign that government policy continues to stimulate demand, any pre-election rate cut it may have been thinking about will be quickly taken off the table.

Chalmers will be buoyed by the result on Tuesday – in as much as it delivered what he had set out to achieve. And that is, artificially and temporarily bringing down headline inflation.

Again, the problem remains that the numbers are in line with what the RBA had expected and based on that expectation, it has sent plenty of smoke signals that it won’t be rushing toward a rate cut this side of Christmas, in the very least.