Albanese’s cost of living election dilemma

Melissa Clarke: Inflation is stubbornly high in Australia, making every trip to the shops and paying bills really painful. For those with debt, expectations of an interest rate cut this year have evaporated and another rate rise is a distinct possibility. It’s not how the Federal Government had hoped the year would pan out. Today, Patricia Karvelas, host of RN Breakfast and Q&A and the Party Room podcast, on how high prices are changing political calculations. I’m Melissa Clarke in Canberra on Ngunnawal country and acknowledging other custodians. This is ABC News Daily. PK, the official interest rate hasn’t risen since November last year and there was a lot of hope that the Reserve Bank was done lifting rates and things would stabilise and the next interest rate move would be a cut. I was certainly hoping that. But the threat of another interest rate hike hasn’t really gone away, has it? It’s still sort of hanging over our heads.

Patricia Karvelas: Isn’t it ever? It’s hanging over every household that has a thumping mortgage. A lot of households are very nervous, trying to read the tea leaves, listening to every prediction. And I think there’s a lot of news avoidance in our world, but not on interest rates. I think there is high engagement in what will happen next.

News report: The official monthly CPI has spiked in the 12 months to May from 3.6% in April to a six-month high of 4%, raising the chance of a rate hike.

News report: The chance of an interest rate increase as early as next month has risen sharply after the Reserve Bank Board warned that urgent action could be needed to bring down any inflation spike.

News report: The cost of housing is only getting worse and some economists think that means the Reserve Bank will put interest rates up again.

Patricia Karvelas: There’s a lot of trepidation and concern, of course, for the government because their fortunes lie on where this goes next and also I think they do care about, you know, some of them at least.

Melissa Clarke: The pain and suffering that many households are feeling right now.

Patricia Karvelas: Yes, so it’s twofold, to be fair. So at its June meeting, the RBA left rates on hold at 4.35%. That remains at a 12-year high and it’s important to mention that this is after 12 consecutive rate rises and 13 overall. One happened under the previous government, but a lot of this, of course, because we’ve had this inflation dragon, as it’s called, but just this unbearably annoying inflation that is sort of cooked a little bit into the economy at the moment and sticky, as they say, in the economy. Now, in the press conference following the decision, the governor of the Reserve Bank, who is now Michele Bullock, was once again saying nothing is ruled in or out.

Michele Bullock, RBA Governor: I think I should say, because I haven’t said it yet today, we’re not ruling anything in or anything out at the moment.

Melissa Clarke: And the Reserve Bank minutes show that there’s a pretty lengthy discussion going on about what the move should be and whether there should be a rate rise. There’s certainly no discussion of a cut. I don’t think that is giving anyone any relief knowing that.

Patricia Karvelas: We know that there was no discussion of a rate cut. There was a discussion about whether there should be a rate rise. Ultimately, there wasn’t, though. And it seems to me they’re hedging still, right?

Michele Bullock, RBA Governor: ..is that there’s been a few things that have made the board alert to the upside risks. I wouldn’t say it’s increasing the risk of an increase, but it is… they are a bit more focused on that. That reflects the fact that if it looks like inflation is not coming sustainably back in the band within a reasonable amount of time, that just increases the risks that inflation expectations will adjust and that’ll make it harder to get inflation down in the future. So that’s really the crux of it.

Patricia Karvelas: If you look through, as I have, and I know lots of people have, for my own interests as well as my reporting, they’re not sure. They’re really not sure and they’re being pretty upfront about it, actually, sort of suggesting that there’s a few mixed messages in the economy. I think there is… there are some signs that the economy is at a bit of a standstill and then there are parts… there are figures that are coming through, obviously, the latest inflation figure, that it’s still very much with us. The latest inflation figure shows CPI raised to 4%, its highest level in 2024. Now, inflation is largely being driven by fuel prices. Electricity prices were also up 6.5% year on year, so of course energy prices remain sort of baked into the story.

Melissa Clarke: Anyone who’s paid a bill recently can probably attest to that.

Patricia Karvelas: So inflation has come down a long way from its peak and the government always makes that point that it was higher under the previous government, that they have been…

Melissa Clarke: It’s nearly halved what its peak was, so it has come down a long way.

Patricia Karvelas: These are facts, right, and so it has lowered. But it’s still not in the range that the Reserve Bank wants it to be for this interest rate rise not to be on the sort of constantly looming, which is between 2% and 3%. We’re at 4%. The government says that they hope to get it within that range by the end of the year. Is that going to happen? Well, they say they still believe it will, but I don’t know.

Melissa Clarke: That’s looking pretty uncertain.

Patricia Karvelas: It is.

Melissa Clarke: And look, as much as the government and the Reserve Bank are looking closely at the inflation figures, they’re also looking at those economic growth figures, which are pretty dire, aren’t they?

Patricia Karvelas: Yes, they are pretty dire. They feel, and the evidence shows, that we’re at a very, very low rate. So the latest figures show it’s only growing by 0.1%, which has worried many about the prospect of even us being tipped into recession. Again, when you ask the government, they say they don’t think we’re about to go into a recession, that all the advice they’re getting is we’re not about to be in a recession.

Jim Chalmers, Treasurer: The definition of a recession is a couple of quarters of negative growth, and we haven’t had any quarters of negative growth. And so we’re not contemplating that outcome here. The Treasury forecast, the Reserve Bank forecast and others expect our economy to continue to grow.

Patricia Karvelas: But you know what, Mel? I think sometimes we talk, because we’re guided by the evidence in our institutions and the language they use, by what official recession would be, which is two quarters in negative territory, right?

Melissa Clarke: Yep, that’s the official definition. That’s when we declare whether we’re in recession or not.

Patricia Karvelas: I always compare it to the weather. You know how the weather is like it’s going to be 12 degrees today, but it feels like 5 degrees? That’s how I see the economic figures. So it says we’re not in a recession, we’re not going to be in one, but gee, some people really feel like they’re in one, right?

Melissa Clarke: This is resonating with me as a Canberra resident.Minus four and it feels like minus seven. So the economy is pretty much at zero, but it feels like a recession.

Patricia Karvelas: That’s right, and it is struggling. There is no doubt. You know the line that you keep hearing, it barely has a pulse, but then it seems to be pulsing still when you look at inflation being hot and the unemployment rate. We’re going to see more figures on that. And so the next meeting of the RBA in August is quite key, and I’ve spoken to senior government ministers who tell me they are really nervous about that meeting, and they’re not trying to front run or jawbone, or at least they can’t be seen to ever do that. Monetary and fiscal policy has to be separate, but they are very nervous, and they think on balance that realistically, you know, they could see a rate rise in August. It is genuinely on the cards.

Melissa Clarke: Let’s look at some of the information that’s feeding into the Reserve Bank’s decisions. We’re talking about the price of food, the price of petrol, electricity prices. These are the things that are still pushing inflation along that could see the Reserve Bank consider or actually lift rates.

Patricia Karvelas: There is a strong feeling in the community that we go to the supermarket and, you know, we walk out and our wallets are empty after we’ve bought three things, and petrol, that’s the other one we do the most. They’re not discretionary, right? They’re not, oh, okay, I won’t buy a new car, I won’t buy a new dress, I’ll just wear the old dress. It’s I need to buy milk and I need to buy bread because I’m making school lunches. They’re real things.

Melissa Clarke: And I need to drive to work tomorrow or I don’t get any money at all.

Patricia Karvelas: No choice, right? No choice for people. So food prices have risen more than 17% since 2020, and, look, that’s a fact. And, you know, the fact that I think even higher income people have noticed it says a lot because if you’re living on the minimum wage or an award wage and you are going to the supermarket, you can understand. I often make a joke, which I’d like to make here, which is that I cannot believe there are not riots on the streets in relation to these things. I think people have been really patient actually trying to get through a hard time. Fuel prices are high too. Analysis by the NRMA shows the average Australian family is spending more than $100 a week on fuel. Of course, you know, we’ve talked about this, electricity prices going up. So all of that going on, RBA looks at all, they have to look at everything, not just one-off figures, and determine is the economy still too hot? Do we need to do this even though they know they run the risk of maybe tipping the economy into recession so it’s not an easy decision for them?

Melissa Clarke: And the federal government decision isn’t easy either because they want to help people with cost of living. They know people are hurting when it comes to managing a weekly budget, but if they were to give people cash handouts, that’s going to add to inflation which is going to make a rate rise more likely. So it’s a real challenge. How are they going about trying to help people but not accelerating inflation?

Patricia Karvelas: Well, it’s the old wicked problem they have and it’s so wicked that I think it does keep some of them up at night, a lot of them actually. So in the budget they announced this $300 electricity bill subsidy for every household. That’ll come quarterly so it’s $75 a quarter. So it doesn’t come to you as cash though.

Melissa Clarke: And that’s the key bit, right?

Patricia Karvelas: That is absolutely the architecture they’ve built in. So you’re not getting a cheque and then you go spend it, i.e. pushing up inflation by putting money in the economy. It comes in the form of a reduced bill.

Melissa Clarke: Right. And then of course the big ticket item is that every Australian gets an income tax cut which came in on 1 July. But Treasurer Jim Chalmers has also been doing his best to argue they won’t be inflationary either.

Jim Chalmers, Treasurer: No, I think the tax cuts are coming in at precisely the right time and it’s important to remember as well that not every dollar of a year’s worth of tax cuts hit on the first day. So I think that point is sometimes lost when people think about the inflationary or non-inflationary impact of cost of living policy.

Melissa Clarke: So that’s the economics but let’s take a look at the politics. The prevailing wisdom has been that a rate cut was likely towards the end of the year, people would have a good summer break and then that’d be a good time for the Prime Minister to call an election sometime in the new year when everyone’s got a little bit of an easier management of their budget and they’ve had a good summer holiday. So how’s that plan looking right now?

Patricia Karvelas: It’s not going according to the plan. You know when you make a plan for your day and then you run out of petrol as you’re driving?

Melissa Clarke: Because it was too expensive to fill your car.

Patricia Karvelas: And then you’re like I’ve got to call my partner, bring a jerry can. That’s the sort of thing that’s happening here. It’s not going according to plan and often things don’t, right? If you think about even the history of this story, and I want to give it a bit of context, remember the previous Reserve Bank Governor told us that rates, didn’t expect rates to increase. Everyone factored that in and then they did. It’s a bit like that. With this one, you know, the RBA was never that clear but we got the sense from reporting and what the government was expecting that we’d get the rate cut by the end of the year. That was an expectation, not a promise or anything, but an expectation. It’s not going according to that plan.

Melissa Clarke: Does that encourage the Prime Minister to call an election sometime this year, looking into your crystal ball and into the mind of the Prime Minister and what he might be thinking? Because we have to have a federal election before we get to sort of mid-May next year. So at some point he has to make a decision and obviously the politics dictate you try to call an election at the time you think is most advantage to your party. So is there an advantage to calling an election sometime in the second half of this year?

Patricia Karvelas: I can’t see the advantage but not everyone agrees with me, although I think I might be in the majority view from listening to lots of people. The Prime Minister wants to run a full term, he keeps saying it. Prime Ministers have the right to call elections whenever they, well, not whenever but within a timeframe and the Prime Minister will make the decision when he thinks he has the highest chance of doing well. I don’t think one piece of good economic news is enough. I can’t see an election by the end of the year. I don’t see the benefit for the Prime Minister of having election by the end of the year. Why wouldn’t he want to go as long as he can as well? I think it’s more likely to be March, April, maybe even May next year. Ultimately people do vote dominantly on their economic conditions and they will make an assessment based on how the election campaigns played out, so much is undetermined at this stage, about who they think their material interests will be ahead with. Now Peter Dutton will have to make a case about how cost of living will really improve under him. He’s announced some things but I don’t think he’s told a full economic story about how that would miraculously happen. So it’ll be a real contest but if you look at incumbents around the world, people already in power, inflation is an absolute drain on incumbents because people’s material conditions are eroding, they feel it and they get cranky with whoever’s in power and so that’s going to be an issue for Albanese and he knows it.

Melissa Clarke: Patricia Karvelas is the host of RN Breakfast and Q&A on ABC TV and the Party Room podcast. This episode was produced by Bridget Fitzgerald and Oscar Coleman. Audio production by Sam Dunn. Our supervising producer is David Coady. I’m Melissa Clarke. ABC News Daily will be back again tomorrow. You can find all of our episodes of the podcast on the ABC Listen app. Thanks for listening.