The Reserve Bank of Australia Governor Michelle Bullock has consistently made the point that Australia’s inflation and cost-of-living crisis cannot simply be blamed on conflicts in the Middle East or other overseas events.
While global shocks have affected energy markets and supply chains at various times, Bullock has repeatedly indicated that the inflation Australians now experience are largely due to domestic economic conditions.
That reality should shift attention to the policies being pursued in Canberra.
The federal government has continued to defend its economic management while advancing an agenda it argues is necessary to support households and invest in Australia’s future.
Critics, however, contend that excessive government spending has added to inflationary pressures rather than easing them.
The economics behind this argument are relatively straightforward.
When governments inject significant amounts of money into an economy that is already operating close to capacity, demand can outstrip supply.
This means, businesses will respond by raising prices, workers will seek higher wages to maintain purchasing power, and inflation becomes more difficult to contain.
The Reserve Bank is then forced to respond by keeping interest rates higher for longer, placing additional pressure on households with mortgages and businesses carrying debt.
Compounding this challenge is Australia’s declining productivity.
Productivity growth is one of the key drivers of long-term prosperity because it enables businesses to produce more goods and services without proportionately increasing costs.
When productivity stagnates or declines, economic growth slows and wages struggle to keep pace with inflation. Living standards also come under pressure.
Immigration has helped cushion some of these economic weaknesses.
New arrivals contribute to the workforce, start businesses, pay taxes, and spend money as they establish their lives in Australia.
This spending stimulates sectors such as retail, transport, hospitality, and consumer services.
However, immigration also increases demand for housing.
Australia’s housing supply has failed to keep pace with rapid population growth, creating intense competition for rental properties and homes for purchase.
The result has been rising rents, higher property prices in many markets, and increasing pressure on first-home buyers.
Treasurer Jim Chalmers has promoted the government’s housing policies as measures that will improve affordability.
Yet the basic principles of supply and demand suggest that affordability cannot improve substantially while demand continues to outpace supply. Increasing the number of people competing for a limited number of homes inevitably places upward pressure on prices and rents.
Economic fundamentals are difficult to ignore.
When supply is constrained and demand rises, prices increase. Conversely, when housing supply expands sufficiently to meet or exceed demand, price pressures begin to ease. Improving affordability ultimately requires significantly increasing housing supply while ensuring population growth remains sustainable.
Shadow Treasurer Tim Wilson has repeatedly argued that Australia’s “inflation is home-grown.”
He has consistently maintained that government spending has contributed to persistent inflation through higher energy costs, increased construction expenses, and broader economic mismanagement.
Whether one agrees with every aspect of Wilson’s critique or not, his central argument reflects a widely accepted economic principle that persistent fiscal expansion can make inflation more difficult to control.
This debate should rise above partisan politics.
Australians are less interested in political slogans than in practical solutions that restore affordability, improve productivity, increase housing supply, and bring inflation under control.
Until those underlying economic fundamentals are addressed, the cost-of-living pressures confronting households are unlikely to ease in any meaningful or lasting way.
