Treasurer Jim Chalmers contradicts RBA governor Michele Bullock in headline inflation claim

Jim Chalmers has claimed Reserve Bank governor Michele Bullock is focused on the headline inflation rate, despite the central bank looking past this measure when considering interest rates because it has been temporarily lowered by state and federal electricity rebates.

Speaking during question time, Jim Chalmers said ‘the Reserve Bank ... say in their new forecast that they’ll hit the midpoint of the target band (2.5 per cent) on the headline measure in June of 2025’. Picture: NewsWire / Martin Ollman

Jim Chalmers has claimed Reserve Bank governor Michele Bullock is focused on the headline inflation rate, despite the central bank looking past this measure when considering interest rates because it has been temporarily lowered by state and federal electricity rebates.

Speaking during question time on Wednesday, the Treasurer also rebuffed Coalition criticism over the level of public spending, claiming Labor’s policies were helping tame price pressures as evidenced by the RBA’s forecasts.

“The Reserve Bank targets the headline measure, and they say in their new forecast that they’ll hit the midpoint of the target band (2.5 per cent) on the headline measure in June of 2025,” Dr Chalmers said.

Attacking Angus Taylor, Dr Chalmers accused the opposition Treasury spokesman of “trying to confuse people” by focusing on underlying inflation, which the RBA projects will return to its 2 to 3 per cent target band by the end of 2025.

“If he wants to talk about underlying inflation, if he wants to be accurate, he would also fess up and say they downgraded their forecasts for underlying inflation as well,” he said.

However, Ms Bullock has repeatedly stressed that the RBA will ignore the headline inflation measure – which has fallen to 2.8 per cent – and will instead focus on the underlying rate. The RBA expects the headline measure to rebound to 3.7 per cent by the end of 2025 once the rebates expire, before sustainably returning to target 12 months later.

“Underlying inflation has been the pulse of inflation,” Ms Bullock said on Tuesday. The RBA still sees underlying inflation, currently at 3.5 per cent, as “too high” to begin cutting interest rates.

Speaking on Thursday before senate estimates she added: “When we talk about underlying, we’re not targeting underlying. But what underlying is giving us a flavor of is what is the underlying pulse of inflation. So if you look at headline, our forecasts show it comes down to 2.5 goes back up again.”

Analysis released by the RBA shows Australia’s underlying inflation rate is the second-highest among major advanced economies, outstripped by only by Britain.

Ms Bullock on Tuesday also urged Dr Chalmers to be “very conscious” of the inflationary impact of any new spending announcements, admitting the ­central bank had underestimated the growth in government spending due to unexpected cost-of-living handouts and higher spending in health and social services.

In a separate appearance before Senate Estimates on Wednesday, Treasury secretary Steven Kennedy – who sits on the RBA board alongside Ms Bullock – said public spending had been a “strong contributor” to economic growth over the past year.

“The strength in public consumption reflects increases in spending on health and education, including Medicare, the National Disability Insurance Scheme and the Pharmaceutical Benefits Scheme,” he said.

State budgets in May and June had also tipped about $20bn of new spending into the economy, Dr Kennedy said. Additional spending by the government will be reflected in the mid-year economic and fiscal outlook, scheduled for release in December.

Appearing alongside Dr Kennedy, Finance Minister Katy Gallagher would not be drawn on whether the upcoming mid-year budget update would further stoke demand with Dr Chalmers having previously alluded to an extension of existing cost-of-living measures.

But with uncertainty over additional government outlays, economists claimed the Reserve Bank could hold off on rate cuts until after the election when it is aware of the victor’s fiscal strategy.

IFM Investors chief economist Alex Joiner said the “materially different” fiscal stances likely to be taken by Labor and the Coalition to the election may leave the RBA to hold fire on rate cuts until after the poll.

“The government will be hoping the RBA cuts before the election but it may be prudent for the RBA to wait after the election to see what fiscal policy might do before it commences an easing cycle,” he said.

KPMG chief economist Brendan Rynne said a recent rallying in government bonds and the pull back in rate cut expectations to May 20, just four days before the cut-off for a federal election, indicated that high government spending would continue.

“What that is suggesting to me is that financial markets are thinking that government spending is going to be dragged out, that there’s going to be inflationary pressure in the economy for longer,” Dr Rynne said.

“That is going to make the pathway for rate cuts more difficult.”

However, Dr Rynne argued the RBA was unlikely to hedge any decision on the outcome of the federal election given its strategy so far.

“The response by the Reserve Bank has been clearly data dependent, which means it must be backward-looking by definition,” he said.