Quick and bitter medicine will come if inflation persists

The Reserve Bank of Australia building in Sydney.

Team Australia is traversing a perilous path between triumph and failure in its inflation war.

Our top two economic officials fronted the Senate on Wednesday to account for their combat actions and the frank message for the public was the result could go either way.

Inflation has probably peaked but that doesn’t mean it’s game over, as overly excited ministers in the Albanese government have prematurely evaluated.

The nation’s short-term fate is in the hands of the nine members of the Reserve Bank board, who a week ago hiked the cash rate target to 3.35 per cent, and signalled more interest-rate rises were on the way.

If the increasingly beleaguered and belittled central bank nails the landing of its aggressive monetary flight, then demand eases, inflation subsides and unemployment rises to a level still below our pre-pandemic performance.

If the RBA board can’t subdue its foe, even more pain than a couple of rate rises will be required, which would cause a bigger fall in home values, bludgeon spending, send some companies bust and cause the jobless rate to rise appreciably.

At the Senate estimates hearing, Treasury secretary Steven Kennedy said the core elements of our challenges had been anticipated in the October budget. “Cost shocks and inflation remain a near-term challenge, growth is expected to slow significantly but the unemployment rate should remain at low levels by recent historical standards,” said Kennedy, a central bank board member since 2019. “This is sometimes called the narrow path. It is also an uncertain path given the highly unusual circumstances all countries have been facing. In the light of this uncertainty, policy-makers will need to be prepared to respond quickly to new evidence as it emerges.”

That means watching the fallout in the real economy, sifting the data as it rolls in, and doing “whatever it takes”.

Presumably, the drip-drip-drip of monthly 0.25 percentage point hikes could end, only to be ratcheted up in a flash if events demanded a heavy response.

RBA governor Philip Lowe doubled down and buckled up.

He told senators he thought a price-wage spiral was low risk, but if that did occur, the board would not hesitate to kill it off.

Solid wage rises were OK, but if pay outcomes matched the current 7.8 per cent headline consumer price index, that kind of “corrosive” inflation would wreak havoc on savers and workers and make the nation even more unequal.

What is the Albanese government doing to help?

Kennedy and Lowe were in perfect harmony about fiscal policy being at a “neutral” setting, meaning the deficit from Canberra’s excess of spending over taxing was not stimulating demand, and stoking inflation.

Of course, the econocrats did put on the record again what Labor could do to improve the budget, raise productivity and trim inflation over the years ahead – policy moves that won’t surprise Jim Chalmers.

Such cures for multiple ills will require more ardour than has been on display in federal parliament for many years, especially if they are to survive the treacherous low country of a Labor caucus, a directionless Coalition and the assorted nuts of the dissolute crossbench.