Economists say Jim Chalmers’ focus on headline inflation ‘a political ploy’

Drawing criticism from economists who claimed he was attempting to hoodwink the public, Jim Chalmers on Thursday doubled down on his emphasis of headline inflation despite the stance of the Reserve Bank.

Treasurer Jim Chalmers, left, and RBA governor Michele Bullock. Picture: Martin Ollman / NewsWire

Economists have criticised Jim Chalmers for focusing on headline inflation numbers that have been distorted by state and federal electricity rebates, accusing the Treasurer of using the figures as a “political tactic” to downplay the strength of price pressures in the economy.

RBA officials have repeatedly said the board’s focus is on the underlying measure of consumer prices growth, rather than the headline inflation rate which has been temporarily lowered by state and federal electricity bill rebates.

But speaking during question time on Thursday, Dr Chalmers triumphantly declared “headline inflation is now back in the target band for the first time since 2021”.

“As the secretary of the Treasury said yesterday, as I said yesterday, as the governor of the Reserve Bank said today, the ­Reserve Bank targets headline inflation, but underlying inflation is important as well,” Dr Chalmers said.

While the annual headline inflation rate dipped to 2.8 per cent in September as a range of electricity bill rebates came into effect, the RBA expects that figure to rebound to 3.7 per cent by the end of 2025 once the support expires. The measure will sustainably return to the RBA’s 2 to 3 per cent target band 12 months later.

By contrast, underlying inflation – measured by the RBA’s preferred trimmed mean gauge that strips out volatile price changes – is currently at 3.5 per cent, and not expected to fall within the target until the end of 2025.

Betashares chief economist David Bassanese argued Dr Chalmers’ focus on the headline inflation reading was a “political tactic” that “didn’t hold water”.

“We know in the short run headline inflation is being distorted by cost-of-living measures, most clearly the electricity bill rebates,” Mr Bassanese said.

“Even if you focus on the headline it’ll be outside the RBA’s target next year – it’s going to bounce back to 3.7 per cent.

“Most economists would agree with what the RBA is saying, not what the Treasurer is saying. I don’t think people will buy it.”

Challenger chief economist Jonathan Kearns said Labor’s focus on headline inflation was “all about communication”.

“It enables them to sell a message that the inflation problem has been solved. The reality is that’s not the case,” said Dr Kearns, who formerly headed the RBA’s Financial Stability Department.

“Most people will appreciate that and feel the inflation problem has not passed; there’s a degree of scepticism from most people.”

While household borrowers hold out for relief, investors on Thursday narrowly tipped the RBA would not cut rates until July, threatening Labor’s hopes of pre-election drop. Previously, markets were fully priced for a quarter point rate cut at the bank’s May 20 meeting, just four days before the cut-off for a federal election.

In the event that interest rates were reduced earlier than expected, Dr Kearns said he expected the RBA’s easing cycle to be shallow.

“The cuts aren’t going to come very steeply. Even if you get a cut early next year, there’s a chance the second cut won’t come until very late in 2025, possibly not next year at all,” he said.

Additional government spending could also further delay rate cuts, economists believe.

Fresh analysis released by investment bank UBS on Wednesday found that public demand – a proxy for government spending – was also growing at an annual rate of approximately 8 per cent, adding a substantial 2 percentage points to GDP growth. UBS expects further fiscal stimulus in the lead-up to the election, further adding to demand.

“This supports UBS’s view that the RBA will keep interest rates higher for longer,” the bank’s Australian chief economist, George Tharenou, said, pencilling in a rate cut for May 2025.

However, appearing before Senate estimates on Thursday, RBA governor Michele Bullock said the “attitude” from Dr Chalmers towards public spending was the right one. “He knows that, and he’s told me this, that fiscal policy has to work with monetary policy on this,” she said.