Article by Adam Creighton, courtesy of The Australian
29.01.2026
Inflation and unemployment are often discussed alongside each other, but the truth is the former is far more lethal, politically and economically, especially when it’s high and increasing.
It is positive the jobless rate fell unexpectedly to 4.1 per cent in December. But no one – bar those newly employed and their immediate family – really much cares. Yet it is a disaster the inflation rate surged from 3.4 per cent to 3.8 per cent in the year to December because that reflects falling living standards for everyone.
Changes in the consumer price index reflect actual inflation far better than the official jobless rate, which includes individuals who work for as little as one hour a week and excludes anyone who has given up looking for a job.
The latest embarrassing rise in inflation almost guarantees that interest rates will rise in the coming months, ensuring a double whammy for hundreds of thousands of households with variable rate loans.
The latest bump is all the more concerning given the Australian dollar has been broadly appreciating throughout 2025, reducing the cost of imported goods and services.
On Wednesday, Treasurer Jim Chalmers blamed “price pressures” for “hanging around longer than we’d like”. As this paper’s former economics editor David Uren once said to me: “What the hell is a price pressure?” Inflation doesn’t mysteriously emerge; politicians use vague phrases to abrogate responsibility.
Inflation is a choice, and it’s no wonder it’s rising given rampant state and federal government spending growth and ongoing budget deficits.
Exploding federal spending – the most rapid growth since the Whitlam years – on the NDIS and industry subsidies is bad enough, retarding productivity and directing workers away from more productivity activities. But the budget deficits add directly to inflationary pressure too by supercharging the creation of new money.
In a new book on monetary economics, The Age of Debt Bubbles, the government’s role in directly bolstering inflation – a rarely understood subject – is laid bare. “It’s worth reiterating this point,” writes William White in the opening chapter, “when a bank purchases government bonds, it typically does so by creating new money out of thin air”.
Chalmers should read White’s book. As former head of monetary economics at the Bank for International Settlements (sometimes called the central banks’ central bank), he knows what he’s talking about. When the government runs budget deficits, they boost the money supply which in turn increases prices as it seeps into the economy.
Still, it’s not only the federal government. States have been spending recklessly as if they are still in lockdown. As S&P recently warned in a report issued earlier this month, public sector employee costs have been rising at an unconscionable 7 to 8 per cent a year.
State debts, typically ignored when Canberra boasts of its relatively low indebtedness compared with other countries, is set to hit $660bn this year, or 24 per cent of GDP – all of which is ultimately Canberra’s responsibility.
If there’s any silver lining to uncomfortably higher inflation in Australia, perhaps it’s that more of us will now be forced to understand what causes it.
Visiting Argentina last year, a country that has endured numerous episodes of hyperinflation, I was stunned at how many people blamed excessive growth in the money supply for the nation’s economic woes. Few economists will talk about money supply when analysing inflation, which is why their forecasting record has been so risibly pathetic – failing totally, for instance, to predict any of the multi-year post-Covid surge.
More than a quarter of all the Australian dollars in existence today were created in the past five years. In the 12 months to November, for instance, one measure of the sum of Australian dollars, known as M3, rose 7.3 per cent to $3.33 trillion. That’s a lot of new money (almost totally in bank deposits) chasing a similar volume of goods, services and houses and apartments, which is where most of the new money is initially spent.
The government’s misguided encouragement of first-home buyers to take out home loans with as little as 5 per cent deposits is another inflationary policy.
Banks create new money when they issue loans, another very poorly understood fact, so more rapid growth in home loans underpins higher inflation.
Inflation is likely to get worse before it gets better. The latest December figures don’t fully reflect the removal of federal energy rebates for households, which had been artificially weighing on the CPI. Indeed, the fact that the government budget update before Christmas added almost $50bn in new spending – on economist Chris Richardson’s calculations – highlights a spending growth so brazen and reckless it can’t even be adequately counted.
While punters will be upset about looming interest rate hikes, at least it will lead to less money creating loans and make it more costly for the government borrow even more.
Adam Creighton is chief economist at the Institute of Public Affairs.
