{"id":760852,"date":"2026-06-26T04:59:21","date_gmt":"2026-06-26T04:59:21","guid":{"rendered":"https:\/\/www.newsbeep.com\/au\/760852\/"},"modified":"2026-06-26T04:59:21","modified_gmt":"2026-06-26T04:59:21","slug":"inflation-and-unemployment-why-the-rba-has-been-so-chill-about-putting-jobs-on-the-line","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/au\/760852\/","title":{"rendered":"Inflation and unemployment: Why the RBA has been so chill about putting jobs on the line"},"content":{"rendered":"

June 26, 2026 \u2014 5:00am<\/p>\n

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There\u2019s a reason why the Reserve Bank has seemed so relaxed about the effect its interest rate hikes might have on people\u2019s jobs \u2013 and it\u2019s not because the bank is heartless, cold or even just hell-bent on getting prices to stop surging at all costs.<\/p>\n

The RBA\u2019s focus over the past few years has skewed towards softening price growth over protecting jobs despite its \u201cdual mandate\u201d: its equal responsibilities to keep inflation low and stable, and to keep most people in their jobs.<\/p>\n

\"ReserveReserve Bank governor Michele Bullock might seem hell-bent on getting inflation down, but it might partly be because of the shape of the Phillips curve.Matt Davidson<\/p>\n

That\u2019s largely because while unemployment has remained near historically low levels, prices have stubbornly continued to rise much faster than the 2 to 3 per cent a year that the bank \u2013 and many of us \u2013 are comfortable with.<\/p>\n

RBA governor Michele Bullock has also repeatedly reminded us that while people losing their jobs \u2013 or struggling to find one \u2013 is not ideal, higher prices affect everyone, and especially those on lower incomes who spend a larger share of their income just on everyday necessities.<\/p>\n

But there\u2019s another reason why the bank has not been as worried as some economists have been about the possibility of people losing their jobs as it lifts interest rates<\/a> to slow down the economy.<\/p>\n

And it comes down to the relationship between inflation and unemployment that RBA deputy governor Andrew Hauser spelled out in a speech this week.<\/p>\n

\"RBARBA deputy governor Andrew Hauser.Louise Kennerley<\/p>\n

Many of us know the relationship between inflation and unemployment is generally \u2013 although not always \u2013 inverse.<\/p>\n

That is: when unemployment is high, and more people are on stand-by (therefore indicating we have spare capacity in the economy), businesses don\u2019t have to pay as much to attract and keep workers, and they tend to lift their prices more slowly.<\/p>\n

And when unemployment is low, meaning we\u2019re running low on workers that businesses can recruit to help boost supply to keep up with demand, prices tend to rise.<\/p>\n

Related Article\"Inflation<\/a><\/p>\n

You can look at it the other way around as well.<\/p>\n

If we try to reduce inflation \u2013 by, for example, lifting interest rates \u2013 that tends to come with higher unemployment. And when inflation rises \u2013 often because our demand for goods and services is stronger than our ability to supply them \u2013 unemployment tends to fall because businesses want to hire more people to pump out the things we want to buy.<\/p>\n

But it\u2019s not a clean trade-off. A change in the rate of unemployment won\u2019t always lead to an equal, opposite change in the rate of inflation.<\/p>\n

When we map the relationship out on a chart, known as the Phillips curve, with inflation on the Y \u2013 or vertical \u2013 axis and unemployment on the X \u2013 or horizontal \u2013 axis, it\u2019s not supposed to be a completely straight line from the top left to the bottom right.<\/p>\n

While economists like to call all lines (whether straight or rounded) a \u201ccurve\u201d, the original Phillips curve is, indeed, meant to be a curve as most of us would recognise it.<\/p>\n

Basically, the curve is steeper towards the left: a change in inflation, when it\u2019s relatively high, comes with a much smaller change in unemployment. And the curve is flatter towards the right: inflation remains fairly low, but even a small change is accompanied by a proportionately bigger change in unemployment.<\/p>\n

There are a bunch of theories about why this is the case. One, for example, is that wages rarely shrink. So when the economy is weak and wage growth is very sluggish, further economic weakening and higher unemployment has very little room to push wages (one of the main costs for businesses) down any further, and therefore has very little effect on prices.<\/p>\n

The rounded Phillips curve helps to explain why our unemployment rate has stayed surprisingly low despite a bunch of interest rate rises aimed at dampening inflation. The economy is still on the steep end of the curve, where policies aimed at lowering inflation don\u2019t have much of an effect on unemployment.<\/p>\n

While we can\u2019t rely too heavily on single monthly reads of inflation or unemployment \u2013 which can jump around for a range of factors and aren\u2019t always accurate \u2013 the latest figures, published this week, show the unemployment rate fell to 4.4 per cent in May despite several interest rate hikes this year.<\/p>\n

\"UnemploymentUnemployment has moved higher over recent years, but at a slower pace than was expected.Louie Douvis<\/p>\n

Unemployment over the past four years has, without a doubt, generally moved higher, but it\u2019s done so much more slowly than we might have expected \u2013 and remains lower than the 5 to 6 per cent range we saw for much of the past two decades.<\/p>\n

As Hauser points out, the Phillips curve also helps to explain why, during the pandemic, inflation around the world leapt \u201csharply and unexpectedly upwards\u201d as unemployment dropped to very low levels. We were, again, on the steep end of the curve where inflation moves more dramatically than unemployment.<\/p>\n

But how did we lose sight of the fact that the curve is \u2026 well, curved?<\/p>\n

The flattening out of the curve by economists happened, Hauser explains, because the relatively stable economic conditions after the inflation surge of the 1970s seemed to suggest the Phillips curve was straighter than its inventor had thought back in the 1950s: inflation and unemployment were at a place where both were moving by similar amounts.<\/p>\n

Related Article\"Economics<\/a><\/p>\n

It was also because many economists, who were increasingly using mathematical equations to analyse the world, thought that straight \u2013 or \u201clinear\u201d \u2013 relationships were easier to plug into their calculations.<\/p>\n

But this meant that as we came out of the pandemic, a lot of economists were caught off guard by the sudden surge in inflation: that relatively straight Phillips curve they liked using wasn\u2019t the right fit.<\/p>\n

With the government and Reserve both revving up the economy through higher spending and lower interest rates (and with unemployment at very low levels), the original, rounded Phillips curve would have more accurately predicted what ended up happening: a big surge in inflation.<\/p>\n

But what does this all mean for the Reserve Bank and monetary policy?<\/p>\n

Well, put simply, if the bank believes the Phillips curve is more rounded than straight, and that we\u2019re on the steeper part of it \u2013 where inflation is relatively high and unemployment is relatively low \u2013 it is more likely to want to get on the front foot by ramping up interest rates, and less likely to be worried about how much that might worsen unemployment.<\/p>\n

Related Article\"One<\/a><\/p>\n

The good news about being on the steeper end of the curve is that any steps the bank takes to reduce inflation \u2013 for example, by ramping up interest rates \u2013 should have a proportionately smaller effect on unemployment compared with inflation. Raising interest rates and reducing demand should bring inflation down without kicking too many people out of work.<\/p>\n

Of course, as Hauser notes, the bank \u2013 and policymakers more broadly \u2013 have to remain humble. It\u2019s nearly impossible to know exactly where the economy is positioned on the Phillips curve at any point in time, and things are constantly changing.<\/p>\n

We also still want \u2013 as much as possible \u2013 to preserve the big \u201cwin\u201d we\u2019ve had with historically low unemployment as we try to get inflation back down. Getting too excited and ramping up interest rates too quickly, or by too much, can still lead to unnecessarily high unemployment \u2013 especially if the bank misjudges exactly where we are on the Phillips curve.<\/p>\n

And as with all economic models and charts aimed at simplifying the world, how things play out is never quite as neat or predictable as the lines \u2013 whether straight or curved \u2013 might suggest. Understanding it, however, helps us to peer into the mind of the Reserve Bank board as it tries to steer us away from high inflation while keeping as many of us as possible in our jobs.<\/p>\n

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning<\/a>.<\/p>\n

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\"MillieMillie Muroi<\/a> is the economics writer at The Sydney Morning Herald and The Age. She was formerly an economics correspondent based in Canberra\u2019s Press Gallery and the banking writer based in Sydney.Connect via X<\/a> or email<\/a>.From our partners<\/p>\n","protected":false},"excerpt":{"rendered":"June 26, 2026 \u2014 5:00am Save You have reached your maximum number of saved items. Remove items from…\n","protected":false},"author":2,"featured_media":760853,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[64,63,99,164],"class_list":["post-760852","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-au","tag-australia","tag-business","tag-economy"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/760852","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=760852"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/760852\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/760853"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=760852"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=760852"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=760852"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}