Australians continue to face cost-of-living pressures and the prospect of higher interest rates. An RMIT expert explains why the Reserve Bank's battle against inflation is becoming more difficult when other economic forces are pulling in the opposite direction.
Ashton De Silva, School of Economics, Finance and Marketing:
"Imagine you're trying to lower your cholesterol, but you're required to eat a three-course meal. The entrée is deep fried, the main course is a healthy fish and salad, and dessert is a rich chocolate pudding with ice cream.
"The entrée represents inflationary pressures from overseas events, such as higher energy and fuel prices. The main course is the Reserve Bank, which is working to reduce inflation through higher interest rates. The dessert represents government spending, which can add demand to the economy and make the task more difficult.
"At the moment, the RBA is doing much of the heavy lifting. Interest rate increases are designed to cool spending and bring inflation back within the target range, but they are not the only factor affecting prices.
"The unfortunate reality is that higher interest rates are painful for households. However, allowing inflation to remain elevated would be even more damaging over the long term.
"The challenge for policymakers is ensuring that all parts of the economy are working towards the same goal. When some forces are pushing inflation down while others are pushing it up, the task becomes much harder and the burden can fall disproportionately on borrowers."
