To simplify inflation, many have resorted to talking about the cost of living. When most people think about inflation, they blame grocery prices or fuel costs. I see it as a purposeful distraction from the deeper underlying issue. The real problem is structural, and both major parties built it together.
During COVID, the Morrison government and the Reserve Bank flooded the economy with cheap money. Interest rates were cut to near zero, and billions were pumped into the financial system. This was the spark. Asset prices, particularly housing, surged. People who already owned property got significantly wealthier. People who did not own property fell further behind. Inflation followed.
Here is where it gets worse. The normal response to inflation is for the Reserve Bank to raise interest rates aggressively until borrowing becomes expensive enough that spending slows and prices stabilise. That tool still exists, but it is now dangerous to use fully. Why? Because during those years of cheap money, Australian households took on record levels of mortgage debt. Millions of families stretched their borrowing to the limit because the repayments were manageable at 2% interest rates. They are considerably less manageable at 4%, 5%, or 6%.
This means the Reserve Bank is caught. Raise rates hard enough to kill inflation and you trigger a mortgage crisis that crashes household spending and potentially the housing market. Do not raise them enough and inflation persists, continuing to erode the purchasing power of every wage earner who is not protected by appreciating assets.
The Albanese government inherited this problem and responded with housing subsidies designed to help first home buyers enter the market. The intention was sound. The economics were not. Subsidising demand in a market that does not have enough houses simply pushes prices higher, delivering the benefit directly to vendors and existing owners, the people who needed help least.
The result is a self-reinforcing cycle. Cheap money created inflation. Inflation creates, perpetuates and embeds inequality. The policy response to inequality created more demand pressure. And the debt burden accumulated during the cheap money era now prevents the most effective tool for fighting inflation from being fully deployed.
Keep in mind, there is not one single party responsible for this. It is a story of creating the conditions and then running on policies that knowingly perpetuate the issue. Two separate governments made this bed. Ordinary Australians are sleeping in it.
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