It is hard to imagine after nearly five years of economic pain, but the grim truth revealed by yesterday's batch of high inflation numbers is inescapable: the worst is yet to come.
asserted
worst → imagine → numbers
Most observers now think the Reserve Bank will hike rates again on Tuesday.
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Bank → think → Tuesday
That would take the cash rate to 4.85 per cent, its highest level in 18 years.
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That → take → years
By now, we know this means a tighter financial squeeze for all borrowers.
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this → know → borrowers
Few will want to spare a thought for the politicians, but the news also piled on the agony for Treasurer Jim Chalmers, who had to front up once again for a stony-faced press conference and a Question Time laden with jeers from the opposition benches.
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who → want → benches
As he has done countless times, Chalmers acknowledged those "doing it tough" and solemnly swore the government would continue to be "responsible".
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government → do → it
And, as always, he snarled at "commentators" who say public spending is the root cause of the problem.
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spending → snarl → problem
He might have a point.
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He → have → point
The role of global events is obvious, and is pushing up inflation all over the world.
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role → push → world
And a private sector investment boom, propelled by the rush to build data centres, hasn't helped either.
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boom → propel → centres
Still, how many times can you reassure people that you're doing everything you can and that you're sensitive to the difficulty they're enduring before your words lose weight?
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words → reassure → weight
The answer: you can keep it up for as long as you can sell hope.
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you → keep → hope
And that's getting tough.
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that → get → ?
The demise of the narrow path to a soft landing
Rewind to 2022, when this inflation episode began, and hope was a carefully calibrated part of the message.
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hope → rewind → message
The government and the Reserve Bank were singing from the same song sheet, promising a relatively painless route out of trouble.
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government → sing → trouble
They called it "the narrow path to a soft landing".
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They → call → landing
Interest rates would go up, but not as harshly as in other countries.
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rates → go → countries
They might stay high for a little longer, but without doing excessive damage to the jobs market or the broader economy in the process.
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They → stay → process
There were always those who said this sounded too good to be true.
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this → be → ?
Inflation has wrought havoc whenever it has taken hold in history, and it has rarely been possible to banish it without a recession, such as the one Paul Keating said we "had to have" in 1990.
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we → work → 1990
But it was an admirable ambition, and it's not entirely anyone's fault that it didn't work out.
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it → work → ?
Yes, the "narrow path" strategy probably was the reason why Australia had more heat left in inflation when the war hit.
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war → have → inflation
But that's why it was called "narrow".
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it → call → ?
And the war, coupled with the AI investment boom, have made for a perfect storm not just in Australia but in other countries, too.
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war → couple → countries
The boom pushed up demand, and the war constrained what could be supplied, stretching out the gap where inflation thrives.
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inflation → push → gap
When demand in an economy outstrips what can be supplied, inflation is the result, because the excess demand has nowhere to go other than to bid prices up.
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demand → outstrip → prices
To stamp that out, all that can be done is to slash demand or expand our capacity for supply.
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that → stamp → supply
The latter option is what economists mean when they talk about productivity.
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they → mean → productivity
Sluggish productivity growth is what Michele Bullock calls our "fundamental challenge".
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Bullock → call → what
But, in the meantime, the only other option is to slash demand, from anywhere.
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option → slash → demand
Rate hikes do this by slugging borrowers.
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hikes → do → borrowers
Critics who say they do not address the root cause of inflation misunderstand the aim; it might be unfair, but it can be effective.
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it → say → aim
The government can also reduce demand, either by cutting spending or hiking taxes.
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government → reduce → taxes
That is why economists like Chris Richardson tend not to ask governments to slash and burn, and instead judge them by the precautionary principle: at the very least, don't make things worse by spending more or handing out large tax cuts.
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things → tend → cuts
Of course, that is exactly what governments are tempted to do when voters are worn down by all those high prices.
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voters → tempt → prices
And, as Chalmers put it on Tuesday, helping people with the cost of living can be legitimate and necessary.
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helping → put → living
As the opposition has pointed out, the government could have been a little braver if it wanted to.
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it → point → ?
Spending like the EV discount and the home batteries discount might have achieved a climate goal but has put billions into the pockets of high-income earners.
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Spending → achieve → earners
And as the government points out, nobody in politics wants to identify acceptable spending cuts on a grander scale.
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nobody → point → scale
It's hard to argue that a subsidy here or there is the main reason we are where we are.
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we → argue → ?
…and 9 more, not listed.
The Aporia
