In the past two weeks we have seen both confirmation that Australia has an inflation problem, and the Reserve Bank's response to that problem.

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According to OECD data for the year to December, only a small number of comparable countries exceeded our 3.8 per cent inflation rate, with the majority falling below it, often under 3 per cent. We have previously been a high-inflation country - in the 1980s - and being in that position did not end well.

Related to that, the RBA has just become the first significant central bank to reverse the recent series of interest rate reductions.

The RBA was too eager to lower interest rates last year and must be held to account for that policy error. The government is no doubt happy to let Martin Place take the blame. But is it as simple as that?

The RBA is responsible for monetary policy and as Milton Friedman once said, "inflation is always and everywhere a monetary phenomenon" - meaning that any outbreak of inflation can eventually be snuffed out by tight money and can only be sustained if monetary policy allows it to be.

This is no doubt true, and it was tight money that squeezed out the inflation of the 1980s and brought Australia into line with international inflation norms.

However, to acknowledge the power of monetary policy is not to deny that non-monetary phenomena can make its task harder and increase the costs of curbing inflation. These can be shocks from abroad or home-grown, including government policies.

The government has been rightly blamed for fuelling the inflation flames with too rapid growth of its own spending. This has come not just from the federal government but from several state governments as well.

There are some signs that the growth of public sector demand moderated in 2025 following the strong growth of 2023 and 2024. However, how long this moderation lasts is an open........

© Canberra Times