What if the next move in interest rates is up? Australia’s shock inflation news raises an unwelcome question

There’s a new and unwelcome question being kicked around in offices, cafes and kitchens: what if the next move in interest rates is up? Two weeks ago we got news that unemployment had jumped and it seemed the Reserve Bank of Australia was a sure thing to cut rates on Melbourne Cup day. Related: Inflation jumps to 3.2%, dashing hopes of a Melbourne Cup day rate cut for homeowners Fast forward to Wednesday and we get the shock news that underlying inflation – the RBA’s preferred measure that removes the impact of really big price moves like electricity – climbed for the first time since 2022. Now nobody will take that Melbourne Cup day bet on lower rates. “A rate cut before Christmas did seem reasonable, but that’s not on the cards any more,” says Cherelle Murphy, the chief economist at EY. This is not what millions of homeowners want to hear, not when they’re still struggling to cope with a plethora of costs that are way higher than they were five years ago. Interactive Johnathan McMenamin, the head of economic forecasting at Barrenjoey, an investment bank, says inflation should still slow over the coming year, and the RBA will hold rates steady as they watch price pressures leak out of the economy. But the “clearest risk”, he says, is that inflation is again hotter than expected in the December quarter, which could “lead the bank to hiking at the February meeting”. “Not many people are going to be happy about that, but if you push me, I’d have to say that the risk of a February hike is greater than a February cut.” That’s not a widespread view, at least not yet. Sign up: AU Breaking News email Experts are actively debating whether the RBA is done with its rate cuts, not whether it could be forced to hike. Or as Richard Yetsenga, ANZ’s chief economist, says: “Let’s not panic. “It’s too early to say the easing cycle is over and the next move is a hike.” The morning after the release of the Australian Bureau of Statistics data, financial markets – usually a decent, if fickle, gauge – had pushed back an RBA rate cut until May, with a reasonably high chance of a March cut. In Canberra, where parliament is sitting, the ABS figures landed with a thud. Normally quick to call a press conference minutes after an inflation report, Jim Chalmers was conspicuously silent. James Paterson, the shadow finance minister, wasn’t shy in raising the spectre of stagflation – the high unemployment, high inflation disaster of the 1970s. As the Coalition attempted to blame the inflation rebound on “out-of-control” government spending, Ted O’Brien, the shadow treasurer, quipped in question time on Thursday that it should be called “Jimflation”. Economists are not impressed with either of these claims: that stagflation looms, or that government spending is to blame. John Hawkins, a senior economics lecturer and head of University of Canberra’s school of government, said unemployment in the mid-4s and inflation at about 3% did not ring any stagflationary alarm bells. “That’s a bit of a stretch,” he says. Sticky inflation at around 3% and a rising jobless rate may not be stagflation, but it is an ugly mix – one that paints a pretty dismal picture of the economy’s much reduced potential. Related: So it’s goodbye to lower interest rates – to be honest, the RBA was always looking for an excuse not to cut | Greg Jericho Yetsenga says we are experiencing the tangible reality of an economy that is not as dynamic as it once was. “I feel like we often talk about productivity and it’s a conceptual discussion. But productivity is very tactile; the economy can’t run as quickly as it used to without overheating” and pushing inflation higher. Whereas once the economy could comfortably grow at rates of 3% or more, the RBA recently estimated this potential growth rate was more like 2% – not much above the current, lacklustre rate of 1.8%. More tangibly and immediately, it may mean that rate of unemployment consistent with low and stable inflation may be closer to 5% than 4%. A lot has changed here and around the world post-Covid, but when it comes to the structure of the economy, McMenamin says things are beginning to look depressingly familiar. “In many ways we are slipping back to where we were pre-pandemic.” • Patrick Commins is Guardian Australia’s economics editor