To stop the rate hikes, Chalmers might have to ditch the ‘I didn’t do it’ game

Treasurer Jim Chalmers is facing scrutiny following the Reserve Bank’s recent interest rate hike, though he maintains the government is not to blame. Analysts suggest the focus now shifts to the government’s response to persistent inflation, regardless of its origin.

Inflation Pressure and Government Response

Treasurers are judged as much by circumstances as by their policies, benefiting from good news but also bearing responsibility for negative economic developments. For voters, identifying the source of inflation is less important than seeing effective action to address it.

Chalmers’ attempts to distance himself from the rate hike, even highlighting the Reserve Bank’s statement didn’t mention him, are unlikely to resonate with the public, particularly if further increases follow.

While Chalmers points to the private sector as the primary driver of economic heat, echoing Reserve Bank Governor Michele Bullock, Bullock emphasized that the source of inflation is less crucial than controlling it. The public will expect the treasurer to contribute to a solution.

Whose Trendline Is It Anyway?

The recent rate hike represents a shift from the trend six months prior, when the RBA was cutting rates amid falling inflation. Some within the government had even advocated for further cuts.

The change occurred as household spending increased unexpectedly, leading Bullock to express pessimism in November and openly discuss potential rate hikes in December.

Households contribute to the private sector side of the economy, explaining the faster growth in private sector spending compared to public spending. Chalmers argues this reversal demonstrates the current inflation pressure isn’t his fault.

However, the government can influence household budgets, having implemented cost-of-living relief measures. While intended to help those struggling with higher prices, such measures can inadvertently fuel inflation by increasing disposable income.

The Cost of the Cost of Living

Chalmers and Bullock acknowledge that fiscal and monetary policies have similar, though not identical, objectives when addressing inflation. The RBA uses interest rates to curb economic activity when it becomes unsustainable, while the government aims to support those in need while maintaining fiscal restraint.

Chalmers has faced criticism from the opposition and economists for allegedly failing to strike the right balance, particularly regarding universal spending programs like energy bill relief and subsidies for electric vehicles.

Previously, falling inflation appeared to validate Chalmers’ approach. However, with inflation remaining above 3 percent and rates increasing, a reassessment of government spending may be warranted.

This isn’t about assigning blame, but recognizing the potential impact of the federal budget, which spends hundreds of billions of dollars annually.

Chalmers has often contrasted his government’s approach with the perceived chaos within the opposition, positioning his Labor colleagues as the “adults” in the room.

A pragmatic response would involve prioritizing effective policy over defending against criticism and acknowledging the need to address inflation directly.