After 13 interest rate hikes that sent home loan repayments soaring, we still have an inflation problem.

Actually, make that 17. The Reserve Bank may have lifted rates on 13 separate occasions but a few of those were double-whammy hikes at twice the normal 0.25 percentage point increases.

In any other universe, that should have sent the economy into a tailspin, put vast numbers of workers on the dole, crashed the property market and batted price rises back into zombie territory.

True, the economy is only barely managing to stay afloat with just 0.1 per cent growth in the most recent quarter.

But the jobs market, while slackening, remains incredibly strong, real estate markets are booming and inflation is still travelling at a dangerously uncomfortable speed.

Late last year, the speed at which prices were rising began to slow quite dramatically.

But since then, it has refused to budge with the latest numbers indicating prices are still rising at about 3.6 per cent a year.

That’s a long way north of the 2 to 3 per cent band for which the RBA is aiming.

The solution, according to a range of armchair critics, is that Michele Bullock and her team need to whack the economy again with a couple more rate increases, just for good measure.

Two years of rate rises have failed to slow the economy down enough to get inflation back within the RBA’s preferred range.(ABC News: Che Chorley, CHE CHORLEY)

What’s gone wrong?

Well, not everything. Inflation has more than halved since it peaked at 7.8 per cent in late 2022. So, there’s no denying that rate hikes have been incredibly effective, at least until a few months ago.

But a large part of the problem is that we are not fighting the textbook version of inflation.

Normally, prices rise when there is more money sloshing around an economy that is chasing a limited amount of goods and services.

And the standard way of fixing that is to remove some of that excess cash, either by raising interest rates or increasing taxes, to bring the system back into balance.

That’s what the RBA has been doing. But right from the get-go, they encountered difficulties. The early round of inflation was down to supply shortages rather than excess demand.

Ignited by Russia’s invasion of Ukraine, which sent energy prices soaring, it followed a chaotic return to normality in global trade after the pandemic which resulted in shortages of almost everything.

Two years later and we’re still struggling.

According to the RBA governor, aggregate demand continues to outstrip supply even though a large number of households are under extreme financial pressure as a result of the interest rate hikes.

Why? Because there are a large number of households, mostly older and well-established with little or no debt, that are merrily sailing through the entire inflation firestorm and spending like there’s no tomorrow.

Raising interest rates even further won’t affect this cohort just as the previous 17 have had little to no effect.

Many of those older households were beneficiaries of the vast amount of government money pumped into the economy during the pandemic that plumped up household savings to record levels of around 24 per cent of disposable income.

Despite the intense pressure on many households from rising interest rates, people who no longer have mortgage payments have continued to splash their cash.(ABC News: Danielle Bonica)

More people, not enough shelter

At her Tuesday press conference, Ms Bullock continued to hammer home the term, “aggregate demand”.

Eventually, she was asked about immigration and the role it played in the inflation conundrum.

In the aftermath of the pandemic, she explained, the rapid influx of new workers helped alleviate labour shortages, adding to supply. A good thing, she explained.

But the arrival of more than half a million people last calendar year has put pressure on the economy, particularly housing. That’s helped propel real estate values and been a big contributor to surging rents with vacancy rates less than 1 per cent in some capitals.

Rental growth has been one of the driving forces behind persistent inflation. While it has moderated somewhat this year, it remains a key ingredient in the “sticky” services inflation that we’ve experienced.

Given everyone needs to put a roof over their head, raising interest rates will have little to no effect on reining in the intense price pressures in the housing market. As long as there are too many people for the available housing stock, rents, and hence inflation, will keep rising.

If anything, raising rates has decimated the demand for new home builds, which is at decade lows, meaning the supply of dwellings will fall further behind demand.

Power bills have been another major contributor, as have insurance costs. Both are related to climate change. Again, no amount of rate hikes will fix that.

The rapid population growth has helped maintain an illusion that the economy is still growing. But it’s just that adding more people, by definition, adds to growth. Even then, population growth has far exceeded our economic growth.

Upward pressure on rental prices has been a sticky element of inflation over the past few years.(ABC News: Jack Fisher)

What about the future?

This is where it gets tricky.

If you listen to those baying for more rate hikes, governments both federal and state are the main culprits. Excess spending and massive deficits are making the RBA’s job more difficult.

After two successive surpluses — following a decade of deficits from its predecessor — the Albanese government’s most recent budget forecasts deficits to the horizon.

The main reason for that, however, is the Stage 3 tax cuts. They will inject around $20 billion into the economy in the year ahead and little work has been done on their impact.

Interestingly, many of those now accusing the government of being fiscally irresponsible were among the greatest supporters of the cuts, originally legislated by the Turnbull and Morrison governments, and bitterly complained when the Albanese government announced a redesign to spread the benefits to lower-paid workers as well.

But there is no doubt they will be inflationary, at least to some degree, unless many households stash most of the extra cash into savings, or direct it towards paying down debts or clearing unpaid bills.

If the money is spent, it may add to another spike in consumption, which may be all the RBA needs to retaliate with higher interest rates.

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