Canberra must make the hard decisions now to control inflation

Graph of RBA assets. (Reserve Bank of Australia) H/T Kenelm Tonkin

The increase was a result of federal government policies that needed to be funded-all that sit-down money doled out to electors and industry. And while Treasurer Jim Chalmers will want to blame Former treasurer Josh Frydenberg, they were both complicit.

Labor never demanded the government dial back spending-they always demanded it be increased. Neither Chalmers, nor Frydenberg should be left anywhere near fiscal or monetary levers, but unfortunately, Chalmers is all the Reserve Bank governor has to work with.

The leaks from Chalmer's budget (more like movie trailers than leaks) indicate that the spending is going to continue, more or less unabated, combined with productivity-sapping measures meant to even the playing field, but which will instead level the economy.

So expect Lowe to keep pulling the interest rate trigger. Morgan's chief economist Michael Knox expects rates to top out at 4.85 percent, a full percentage point higher than now.

Knox points to an increase in service inflation rather than government profligacy.

That might be what is currently influencing the governor, but I'd bet he is also worried about the recent increase in house prices, as documented by CoreLogic.

House prices aren't directly in his control, but they are in the control of the state and federal governments, which make it difficult for developers to develop new stock and are currently topping the country up with record numbers of immigrants.

At the same time, construction costs are going through the roof as the various governments gorge on infrastructure and electricity assets that compete away labour and resources-this is where the swollen money supply comes into play. He needs to keep pounding their position until they change policy.

Lowe can be guaranteed to do this because the treasurer's review of the RBA means his contract will not be renewed in September, so he has nothing to lose, only his legacy. He won't want to go down in economic history as the man who let inflation escape.

But if it is not reined in quickly, it will escape.