If there is a rate rise tomorrow, it will increase the chances of Australia going into a recession. My fear is that people have forgotten how terrible recessions are, and because of this we might be sleepwalking into one.

It’s understandable. We haven’t had a real recession since 1991. That’s 35 years ago, before smartphones, social media, and oat frappuccinos.

Yes, technically we had a recession during the pandemic, but the real pain of recessions is felt through high and prolonged unemployment. During the pandemic, the unemployment rate did shoot up from 5.2 per cent to 7.4 per cent. But as the economy began to open up, unemployment dropped back down to the pre-recession level of 5.1 per cent just over a year later.

By comparison, the unemployment rate at the beginning of 1990 was 6.1 per cent. By the end of 1992 it climbed to 11.2 per cent. But the real pain came in the years after. Unemployment didn’t drop back down to the pre-recession rate of 6.1 per cent until the middle of 2000. That’s 10 years of high unemployment.

This had a devastating impact on a huge number of people. It was particularly hard on older workers. There was a cohort of men in their 50s who lost their jobs at the beginning of the recession and remained unemployed until they retired at 65, over a decade later.

Australia is not particularly sympathetic to the unemployed. Australia is a country where unemployment benefits are below the poverty line, meaning people in this position are condemned to dire financial straits.

These were workers, who through no fault of their own, lost their jobs and were then locked out of employment for the rest of their working lives.

The recession caused terrible scarring to the economy, but worse was the impact on Australian society. A recession is something we should do everything we can to avoid. And this was the attitude we had during the global financial crisis, when most of the rest of the world was plunged into recession, but we avoided that fate.

But things have clearly changed.

When the Monetary Policy Board of the Reserve Bank meets today and tomorrow, and is likely to again increase interest rates, it is pushing an already strained economy closer the edge.

Astonishingly, rather than massive concern about this, increasingly, there are those in the media who are calling for higher rates. They have the misguided belief that we need to take our medicine. As if a recession is like swallowing a foul-tasting liquid, that will fix the inflation problem with brief and minimal side effects.

But higher rates will do nothing to bring down inflation. The primary cause of inflation is higher oil prices. Those prices are not going to decrease until there is some kind of deal in the Middle East to open the Strait of Hormuz.

Even the RBA acknowledges this. It claims that while higher interest rates can’t slow price increases, it can make the RBA look tough on inflation and convince people that it is likely to come down soon. They call this anchoring inflation expectations.

But are inflation expectations out of control?

The short answer is no. On the same day the latest inflation data came out, Reserve Bank deputy governor Andrew Hauser told Senate estimates that a surprising feature of the post-Covid period is how well-anchored inflation expectations remain.

And yet the RBA is still increasing interest rates and there is talk of more rises to come.

Another growing inflationary pressure is the huge investment in data centres. They have already pushed up the prices of computer and memory chips, and as more of them open in Australia, they’re likely to increase electricity and water prices.

Worst of all, they will draw workers away from constructing houses to build data centres, at the time when we need more homes. Pouring resources into data centre construction will push up the cost of construction and add further to inflation.

The economic calculus is brutal. There is more money in housing computer chips than in housing families.

Higher Australian interest rates do nothing to convince the AI companies to build fewer data centres. Only governments can restrict them.

A political narrative has also emerged that inflation is somehow the fault of government spending. That might make great headlines, but the evidence shows the opposite. Government demand’s contribution to total demand has been falling since the end of 2024. While it has been falling, inflation has been increasing.

Household demand has also decreased this year as interest rate rises have smashed their budgets. What has been increasing is demand from private investment, mainly for building data centres.

The most important thing to understand is that if the RBA does increase interest rates this week, it will not reduce inflation. Inflation is being driven by oil prices and the massive investment in data centres.

Higher interest rates will not address either of these things.

And as bad as people think it is now, it will be much worse if the economy crashes into recession. That will represent a massive failure by the central bank.

Former prime minister Paul Keating famously said of the 1990s recession, it was “the recession we had to have”. With more rate rises, the RBA is creating the recession we didn’t have to have.