Large government spending has created an inflation “trap” plaguing homeowners with higher prices and interest rates, a leading economist has declared.
The Reserve Bank of Australia lifted the cash rate to 3.85 per cent last week as inflation remains elevated at 3.8 per cent – well outside the central bank’s 2-3 per cent target band.
All eyes have been on the bank and the release of future economic data while money markets forecast at least one more hike this year.
Mortgage holders were dealt another piece of the puzzle after the Australian Bureau of Statistics revealed household spending unexpectedly sank 0.4 per cent in December after rising one and 1.4 per cent in November and October respectively.
It was up 0.9 per cent in the December quarter and jumped five per cent annually.
KPMG senior economist Terry Rawnsley said household spending could continue to fall amid the strain on mortgage holders from the rate hike.
“The big question now is how consumers will respond to last week’s interest rate hike,” Mr Rawnsley said in a statement.
“The hope is that it will prompt households to think more carefully about their discretionary spending, to ease some of the inflationary pressures in the economy and reduce the need for further interest rate increases. Time will tell if that’s the case.”
Blame for the rate hike has also fallen on large government spending, which is forecasted to hit 26.9 per cent of GDP in 2025-26.
EQ Economics’ managing director Warren Hogan said high levels of post-pandemic public spending have created a “trap” encompassing the economy.
“The big problem is over the last three years, the federal and the state governments have all projected a slowdown in their spending over the out years and it’s never materialised,” Mr Hogan told Business Now.
“Part of the reason for that is this inflation that we’ve got in the economy … the cost of their programs is going up (so) they have to pay higher insurance and higher electricity (costs) like the rest of us.
“We’re in this sort of trap and this is why inflation is such a dangerous thing for an economy.”
AMP’s chief economist Shane Oliver similarly argued that large rates of public spending was sending the nation on a “path” that would cause higher interest rates.
“In ideal worlds, the level of public spending should be curtailed somewhat to make room for private spending. But in the absence of that, pressure falls back on the RBA,” Mr Oliver told SkyNews.com.au.
“The RBA hikes interest rates and then it’s the private sector which has to make way for the public sector.
“That seems to be the path we’re going down at present. You end up with higher interest rates, and that slows private spending, consumer spending on these numbers and potentially business investment.”
Public spending has fallen over the past year while private sector demand grew – a point Treasurer Jim Chalmers lauded when the cash rate was lifted.
Mr Oliver argued the public spending was already at too high of a level and needed to come down.
“Public spending didn’t grow as much over the 12 months to September quarter. It was private sector spending which picked up, which is the government’s argument,” he said.
“They said it was mostly private spending, but my view is that you’ve got to look at the level (of public spending) as well.
“Private spending (was) recovering from a … lengthy weak period associated with the (2022 and 2023) rate hikes and other developments banging up against high levels of public spending.
“That in total led to a higher level of aggregate demand in the economy, both public and private.”
In October and November, household spending grew as shoppers flocked to Black Friday and Cyber Monday sales.
Major concerts like Oasis and AC/DC are also believed to have influenced the spending surge.
The largest falls in December included clothing and footwear (down 2.4 per cent), furnishings and household equipment (down 1.7 per cent) and health (down 1.3 per cent).