Governments wear the inflation blame while households suffer the pain

Tim Toohey of Yarra Capital Management argues that the Reserve Bank is misdiagnosing Australia’s inflation problem as primarily one of excess private-sector demand and, as a result, risks keeping monetary policy too tight for too long.

Toohey’s central claim is that while there is indeed excess demand, inflationary pressures are increasingly coming from areas that interest-rate policy cannot effectively control, particularly government-funded sectors and imported inflation, rather than from excessive household spending.

“The household-facing industries make up half the economy. Since mid-2023, demand in those industries has added just 0.05 percentage points a year to economy-wide producer prices”, Toohey wrote.