Back to the drawing board after wake-up call

Just as Reserve Bank governor Philip Lowe and Jim Chalmers were hoping for a sign that inflation was loosening its grip on the economy, Wednesday’s consumer price report will force them to stick with policy choices they would much prefer not to make.

Dr Lowe would dearly like to press pause on the most aggressive rate cycle in three decades, but the official data showing consumer price growth ended the year at 7.8 per cent and showed no signs of moderating comes as a wake-up call that the inflation challenge is as pressing as ever.

The end of the worst of the global energy crisis, falling shipping rates and declining demand for goods amid a worldwide slowdown were supposed to blunt cost-of-living pressures over coming months and allow the RBA to take its foot off the brake.

Instead, economists on Wednesday afternoon were adding extra rate hikes into their forecasts, saying a ninth consecutive increase next month was now a given.

With hundreds of billions in fixed-rate mortgages rolling off record low rates to much higher ones, there is a tsunami of higher interest repayments about to swamp family budgets.

Barrenjoey chief economist Jo Masters estimates that the average mortgage rate is 1.8 percentage points behind the rate hike cycle.

Wednesday’s consumer price report will foce the Reserve Bank to enforce further rate hikes as it attempts to tackle inflation.

That is, the average indebted homeowner has felt less than half of the increase in the cash rate since May last year, which means the bulk of the rate pain is ahead of us.

Dr Lowe is aware the economy could be nearing a tipping point, but judging how close to that tipping point is an educated guess at best.

All of which is to say, after eight consecutive rate rises, the chance of a “policy mistake” is rising alongside every extra hike. And now it looks like we will get more. Perhaps even three more.

As for the Treasurer, he would surely love to splash some cash and help Australian families deal with runaway power prices and cost of living pressures.

Dr Chalmers expects electricity prices to continue to rise in early 2023, even after ABS stats showed they jumped by nearly 9 per cent in the three months to December.

He has said an energy bill relief package will be the centrepiece of his budget in May, but the $1.5bn he has committed – an amount to be matched by states and territories – will flow to pensioners and welfare payment recipients. Middle Australia will miss out.

If it was just the debt and deficit holding him back, Dr Chalmers could make the case for handouts today that would add to economic growth and so not make the longer term fiscal repair task worse … but any extra spending now is counter-productive: it just adds to inflation and makes further rate rises more likely.

Dr Chalmers remains positive the December quarter will be the inflationary peak.

Let’s all hope he’s right.