Jim Chalmers gets the inflation numbers he wants – but at what cost?

Treasurer Jim Chalmers. Picture: Nadir Kinani

Jim Chalmers’s strategy of subsidising his way out of the inflation problem has delivered a modest improvement but a questionable political dividend.

It is unlikely to make a difference to the Reserve Bank when it comes to interest rate settings.

While the headline rate dropped from 3.8 per cent to 3.5 per cent for the 12 months to July, most of this contraction was due to the billions of dollars in energy supplements from commonwealth and the West Australian and Queensland state budgets.

The Treasurer doesn’t shy away from this.

He argues against the critics that the drop in the headline rate isn’t contrived and that there is nothing unorthodox about his subsidies. He says there is nothing artificial about helping people. Fair enough.

But the political and economic debate now hinges on whether by helping people in the short term through handouts to alleviate one factor in the cost-of-living crisis, Chalmers is hurting them more in the long run.

The problem is that core inflation, which also dropped to 3.8 per cent from 4.1 per cent, is simply back to where it was at the start of the year.

You will find few economists that support the notion that you can spend your way out of an inflation problem. It simply flies in the face of logic – a logic supported by the central bank, which sees inflation dipping next year and shooting back up again as soon as the subsidy tap is turned off.

Australia’s core inflation rate still remains the highest among our peers. The only countries which still have a 3 in front of their CPI numbers other than Australia are the US, Britain and Norway.

Core inflation, or the trimmed mean measure, is the one that the RBA is watching closely.

Most economists agree there will be little in the latest monthly numbers that give the RBA board any comfort to adjust its settings in any way favourable to someone paying off a mortgage.

Judo Bank economist Warren Hogan, who has been consistently warning of rate hikes rather than cuts, claims it gives more weight to the possibility of a rate hike in ­November.

RBA chief economist Sarah Hunter couldn’t have been clearer about the bank’s view on subsidies.

“So what the (RBA) board are considering and trying to achieve is inflation sustainably back at the target,” Hunter told a Senate committee hearing in Sydney this month.

“But in terms of being a sustained return to target, that’s not something that we can see coming from those particular policies because they are only legislated for one year. By their nature, they are time-limited and temporary.”

And what happens after the supplements run out? An energy bill shock for everyone and inflation bouncing back up again.

But this won’t happen until after the next election.

People could be forgiven for being cynical about what Chalmers is trying to achieve here.