Inflation in August rose from 3.5% to 4.0%, which might make you think the RBA had a point in raising interest rates yesterday. The problem is that all of the increase was due to petrol prices.
The Australia Institute’s Chief Economist Greg Jericho has slammed the Reserve Bank of Australia’s (RBA) decision to raise interest rates again, arguing there is no data to justify increasing them to the highest level seen in 15 years.
Greg Jericho, Chief Economist at the Australia Institute, annotates the RBA’s latest statement, breaking down what the central bank is really telling us.
At 2:30pm, the Reserve Bank is almost certain to raise the cash rate to 4.6%, the highest it has been since November 2011 when the RBA cut the cash rate from 4.7% to 4.5%. It will be the act of a central bank hostage to old thinking and an inability to react to supply shocks.
When fuel prices rise, so does the Consumer Price Index. Petrol and diesel are embedded in transport, food, deliveries and almost every household budget, and travel between cities needs aviation fuel (Figure 1). If war disrupts oil supply or makes a shipping route dangerous, Australians pay more at the bowser and eventually in the supermarket. Over time, this also damages productivity.
Figure 1. Australian liquid fuels monthly sales by product.
But the Reserve Bank’s job is not merely to notice this sequence and repeat it back to us. It must interpret it – separating inflation caused by excessive domestic demand from inflation imposed by an external shock. Collapsing those two things into one number called “inflation”, then treating higher interest rates as inevitable, is not serious analysis for a 21st-century economy. It is a 20th-century abacus reflex that bludgeons the economy.
New economic tools could help the RBA distinguish an external oil shock from domestic inflation—and assess the consequences for productivity and resilience.
The latest fuel-price escalation from the Middle East conflict disrupted shipping through the Strait of Hormuz and put pressure on refined-fuel markets. These are not painless price adjustments. They are already a form of economic tightening.
For a household struggling to find another $40 or $80 a fortnight for fuel, there is less to spend on everything economists call discretionary. The shock cuts real disposable income and weakens the very demand that rate rises are designed to restrain. It also makes alternatives – solar, batteries, efficient appliances or an electric vehicle – harder to afford. Meanwhile, the windfall flows to those profiting from fossil-fuel scarcity.
The RBA recognises that fuel and other conflict-related costs lift headline inflation. That is precisely why monetary policy requires judgment rather than automation.
No sensible person argues that the RBA should ignore an external energy shock. But it should ask whether the shock is temporary or persistent; whether it is spreading into domestically generated wages and prices; whether inflation reflects excess demand or lost purchasing power imposed from outside Australia; and, most importantly, whether higher rates can fix the cause – or merely add a second burden.
The cash rate cannot reopen a shipping lane, lower the global oil price, manufacture diesel, rebuild after a climate disaster or reverse an insurer’s withdrawal. It may influence the Australian dollar at the margin, but it cannot materially alter the physical scarcity and geopolitical risk embedded in imported fuel.
This does not make the RBA irrelevant. It exposes the limits of its inherited rule set. The Bank should focus on what it can influence: persistent, economy-wide domestic demand and inflation pressure. When war makes fuel dearer, answering primarily through higher rates risks confusing symptom and cause – turning an external supply shock into a domestic mortgage, rental and employment shock.
Much economic reporting has become a betting market on the next RBA meeting. Analysts parse speeches for whether the Bank will raise, hold or cut. Markets price probabilities; journalists report them; and the eventual decision is treated as confirmation that the consensus was right.
But prediction is not evaluation. The role of economic commentary should reflect the old maxim: if one person says it is raining and another says it is not, journalism’s job is to go outside and check.
Quality research, analysis, explainers and factchecks from experts you can trust.
Here, checking means measuring how much inflation comes from oil, the Australian dollar and margins; asking whether households already absorbing higher fuel and food bills need another increase in mortgage repayments; and testing whether a rate rise will improve the situation, rather than merely predicting that the RBA will choose one. If the Bank expects fuel inflation to fade, that forecast is not itself an argument for making households poorer while they wait.
The problem is larger than one interest-rate decision. Environmental economists have long argued that GDP is an incomplete measure of success: it counts expenditure – including money spent repairing damage – without asking whether society, ecosystems or productive capacity are better off.
Gross Domestic Regeneration, or GDR, offers a useful supplementary lens. Associated with Pulse founder Tenzin Seldon, it asks whether an economy restores rather than exhausts three interdependent forms of capital: ecological systems, social wellbeing and resilient economic capacity. Strength in one cannot compensate for collapse in another.
Applied to an oil shock, GDR changes the question. Higher fuel prices may lift CPI, but they also drain household purchasing power, deepen hardship for people without transport alternatives and delay investments that would cut future energy bills. A policy response that adds mortgage stress without reducing oil exposure may improve neither resilience nor long-term price stability.
The durable answer to recurring fuel shocks is not repeatedly suppressing spending after each crisis. It is reducing Australia’s exposure before the next one.
That means accelerating electric transport, renewable electricity, household solar and batteries, public transport, efficient freight and better urban and regional design. It also means strategic fuel resilience, transparent wholesale and retail margins, and targeted relief for regional households and workers who have no practical alternative to driving.
Figure 2. Australian monthly new vehicle sales by drivetrain show a shift away from liquid fuels to electrification.
These are not peripheral climate measures. They are anti-inflation infrastructure. Solar, insulation, heat pumps and electric transport produce recurring household savings while reducing exposure to volatile imported fuels. Productivity would also benefit from directing fuel-excise revenue towards the transition to electric freight vehicles, rural and regional electrification, and renewable-energy hubs.
The economic purpose of a central bank is not to defend a model but to deliver on its mandate: price stability and full employment, serving the economic prosperity and welfare of Australians. An overseas fuel shock is already destroying demand. The RBA should not confuse that imported loss with evidence that Australians must be punished into spending less.
The question is not merely what the RBA will do under its familiar rule set, but what it ought to do. Given the causes of inflation, Australia’s structural vulnerabilities and the costs of another rate rise, what policy mix would perform better?
The real test of economic leadership is knowing the difference between noise, signal and a structural warning. Australia needs a response that regenerates the economy – not one that weighs it down.
Professor Ray Wills is Managing Director of Future Smart Strategies and Adjunct Professor at the University of Western Australia.
Professor Peter Newman AO is Curtin University’s Professor of Sustainability, an IPCC transport lead author and a globally recognised authority on sustainable cities.
