The RBA says there is ‘excess demand’ in the economy. Households doing it tough might disagree

The RBA says there is ‘excess demand’ in the economy. Households doing it tough might disagree Greg Jericho The problem with inflation driven by factors such as wars and supply side shocks is that interest rate rises don’t do much

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O n Tuesday this week came the biggest news regarding inflation. No, not the Reserve Bank’s decision to raise interest rates ; that will do barely anything (although it will most certainly raise unemployment). No, the most important news for inflation was that the US had launched limited strikes on ​Iran’s Qeshm Island.

This announcement came after word from the Iranian government that talks were under way to end the conflict – news that caused the price of oil to drop 11%. But the strike sent prices rising again, before traders took an optimistic stance ahead of Wednesday’s US midterm elections:

This matters greatly for inflation because the Reserve Bank now forecasts inflation will be higher for longer than it forecast three months ago . In August it forecast by June next year inflation would be 2.8%; now it predicts it will be 3.7% and only get to 2.7% by December 2027.

Well, you will hear the RBA talk about capacity constraints and “excess demand”, but let’s not be so gullible as to swallow that story. We all know what has happened: oil prices.

Three months ago, the RBA predicted the price of oil in December this year would be US$81.20 a barrel; now it forecasts US$109.50 a barrel – 35% higher.

In August, the RBA thought by the middle of next year prices would be down to US$75.90 a barrel; now they think the price will be 26% higher at US$95.30.

So let’s not play silly buggers. Inflation is forecast to be higher because the US and Israel’s war on Iran is going for longer than the RBA thought it would in both May and August.

And yet despite the RBA trying to convince everyone they are raising rates because inflation is also being driven by “excess demand”, the reality is no different now from May when Michele Bullock said , after the bank raised rates to 4.35%, that “we’ve seen a sharp increase in fuel and related commodity prices and this is already feeding through to inflation. The recent increases in interest rates will have no impact on this.”