The Albanese government is facing accusations this week that it has failed to help ease inflation with its energy bill rebates and other cost-of-living relief.

The criticism has grown since fresh RBA forecasts that upwardly revised the outlook for demand and consumer spending on the back of higher state and federal government payments.

RBA chief economist Sarah Hunter said on Wednesday that government energy rebates weren’t helping to ease inflation from 3.9 per cent (currently) back to the 2 to 3 per cent target.

“In terms of being a sustained return to target [inflation], that’s not something we can see coming from these particular policies because they are only legislated for one year,” Hunter explained.

“By their nature, they are time-limited and temporary.”

That contrasts how Treasurer Jim Chalmers has characterised cost-of-living relief in the last federal budget; he has routinely claimed energy rebates will help to ease the inflation rate.

“We can be helpful, and we are being helpful, with the design of our cost-of-living policies, which help us get back to targets sooner,” Chalmers told ABC radio on Wednesday.

Chalmers also said it’s “hard to sustain the argument the economy is running too hot”, which has been seen as in dispute with the RBA’s view that demand is still out of balance with supply.

‘Talking past each other’

UNSW Professor Richard Holden, who has consistently argued government energy rebates will not lower inflation, said Chalmers and the RBA are actually talking past each other to an extent.

He explained that on the one hand the RBA is referencing macroeconomic indicators suggesting that price pressures are proving stubborn because the economy still can’t keep up with demand.

On the other hand, Chalmers is referencing the experiences of many individual households who are struggling to make ends meet and are pulling back on discretionary spending nationwide.

But what remains clear, Holden said, is that the energy rebates haven’t helped lower underlying inflation, just measured inflation.

“The RBA is exactly right in terms of what’s going on,” he said.

“The RBA are talking about economics and the Treasurer is talking about politics, and so it’s not surprising they’re talking past each other.

“[Energy rebates] aren’t doing anything to trim mean inflation, which is what the RBA cares about.”

Spending and inflation

A chorus of economists have consistently disputed federal government claims that energy rebates will shift the inflation and the interest rates outlook for households since the budget.

And while Chalmers correctly claimed that the RBA is forecasting a dip in headline inflation later this year as a result of energy subsidies, he failed to mention that the forecast profile shoots up again next year when those rebates roll off.

That’s why, Holden said, the RBA is going to look through the impact of government policies – both at a state and federal level – because what’s really important are underlying price pressures.

Those pressures risk being made worse by higher consumer spending as a result of households having more money left over after paying their bills, but the size of the risk is unclear.

RBA governor Michele Bullock referenced that uncertainty on Tuesday, saying households could save more than expected in coming months as they continue to come up against the cost of living.

On balance, the RBA has not made significant changes to its inflation forecasts, with price growth still set to reach the top of the target band in late 2025 and the midpoint in 2026.

Economist Nicki Hutley said that the rebates are not the same as simply handing out cash to households, and that it is “a little bit unfair” to suggest the federal budget was expansionary.

“If you look particularly at the Queensland government, but even the NSW government – they have been quite expansionary whereas the federal government budget for this year and next will probably be in surplus,” Hutley explained.

“They have been incredibly careful in banking the majority of windfall revenues.”

High-risk strategy

What the debate about the RBA’s latest forecasts shows, Hutley said, is how finely balanced economic risks are over the next 18 months as central bankers forecast inflation to ease.

The RBA has opted against raising rates further despite inflation remaining above its target in an effort to prevent unemployment from rising too much as price pressures ease off in 2024.

But accepting an extended period of inflation being above target is high risk, because it could entrench expectations across the economy that would be difficult and painful to undo later.

That helps explain why Bullock sought to strike a more hawkish tone this week, with the RBA looking to ensure that inflation expectations remain anchored and its strategy isn’t derailed.

“It’s not clear to me how much of what Governor Bullock is saying is aimed at changing behaviour of people and governments as opposed to being seriously concerned,” Hutley said.

“To say the federal government is making the situation worse I don’t think is fair.”

Holden said that while the RBA is trying to limit damage to the economy by keeping rates on pause, it does “back them into a corner” and exposes Australia to inflation risks in the meantime.

That could be one reason it has shown sensitivity to government spending, because it could make inflation stickier than otherwise in the next 18 months when it wants price growth to fall.

“When it comes to inflation … nothing changes until everything changes in a big hurry,” Holden said.

“By the time you notice that [inflation expectations] have lifted, it’s too late, then it’s incredibly hard to get them back.”