This inflation beast must be destroyed in a tag-team effort

Targeted government spending can help the most vulnerable, but making sure the budget does not stimulate demand will ease the interest-rate burden on the mortgage belt. Picture: Gaye Gerard

All over the world, living standards are being squeezed by rising prices. Headline inflation in Australia was 6.1 per cent over the year to June, while incomes likely grew by less than half that rate.

Destroying inflation is the task for central banks and the fight will draw blood as we’ll see on Tuesday when the Reserve Bank raises its cash rate for the fourth month in a row.

The International Monetary Fund expects global inflation to be 8.3 per cent this year.

In rich nations, it sees headline inflation at 6.6 per cent this year, with aggressive interest rate hikes slashing that to 3.3 per cent next year.

The Washington-based body is calling on central banks to spare nothing in the inflation battle, meaning “go hard, go early”, and governments can shield the most vulnerable.

We’ve not seen anything like it, the world’s monetary druids in a bootscooting, synchronised routine of interest-rate kicks.

Treasurer Jim Chalmers. Picture: Gary Ramage

“Tighter monetary policy will inevitably have real economic costs, but delaying it will only exacerbate the hardship,” says the IMF’s Pierre-Olivier Gourinchas.

“Central banks that have started tightening should stay the course until inflation is tamed.”

The process is called “disinflation”, and there are many potholes on that road, not least of which is that GDP growth rates will tumble and the threat of a recession comes into sharper view.

RBA governor Philip Lowe has said it’s a narrow interest-rate corridor to cool demand and beat inflation – and not derail the economy or cause a crash in property values.

Lowe focuses on core inflation, looking through the often-volatile shifts in food and fuels, to judge price and capacity pressures in the economy. Over the year to June, underlying inflation was 4.9 per cent, or twice the midpoint of his 2-3 per cent inflation, the highest since 1991.

Core inflation may not move much higher but the rate that catches the attention of workers and unions is expected to be 7 per cent by the end of the year.

Lowe is trying to restore the bank’s credibility on inflation, so a key part of that is talking tough and making sure the community’s inflation psychology is not altered so that a higher monetary dose is required to get back to target.

Anthony Albanese’s contribution last week about RBA overreach was amateurish and plainly counter-productive.

Where the new government can assist is through budget repair, for which Jim Chalmers will set the scene on Thursday.

Targeted spending can help the most vulnerable, but making sure the budget does not stimulate demand will ease the interest-rate burden on the mortgage belt.

By late October, when the Treasurer drops his first budget, borrowers will be feeling the heat and Lowe will still be turning the monetary screws.

Chalmers won’t be helped by the sugar hits of record-high commodity prices, but it’s time for Canberra not to hinder the inflation fight as the Coalition shamelessly did in its last-ditch budget splash in March.

Labor’s short-term economic task has become clearer, but it has a lot less room to dance.

“The outlook has darkened significantly since April,” says the IMF’s chief economist, Gourinchas. “The world may soon be teetering on the edge of a global recession, only two years after the last one.”