Most people would agree that the state needs to take an active role to prevent excessive price increases. Australia ending up like Argentina (where annual inflation has regularly exceeded 100%, even 200%, in recent years) may sound fanciful, but it probably seemed equally far fetched in Buenos Aires a few decades ago.
Once hyperinflation kicks in, and people become convinced rapid price increases will continue, things can escalate quickly. Knowing your money will be worth half as much in six months time gives you a big incentive to spend it as quickly as possible, which drives up inflation even more.
In Australia, the responsibility of keeping inflation under control primarily falls to the RBA, with cash rate hikes its primary weapon. If prices are going up too quickly, the RBA increases the cash rate to try to curb spending.
When people's mortgage repayments go up, they likely need to cut back on discretionary spending - new TVs or kitchen extensions have to wait. When enough people cut back, the excess demand in the economy cools, and inflation starts to head back towards target levels.
The same applies to businesses and banks, who now have a stronger incentive to stash their cash, rather than spend it.
However, as anyone that's had a home loan or small business loan over the past couple of years will be able to tell you, rate hikes can make things very tough for a lot of people. In fact, many have started to question whether there might be other ways to combat inflation that aren't quite as harsh.
Why rate hikes are a 'blunt instrument'
Cash rate increases don't take into account people's personal financial circumstances e.g. if they have a mortgage. Renters are also impacted to an extent as landlords increase the rent in response to their investment loan repayments going up, but many states have legislation in place to prevent rent from increasing more than once a year.
For people who live in a home they have paid off entirely, interest rates are often irrelevant. According to the InfoChoice State of Aussies' Savings Survey, that's 16.6% of the Australian population. These lucky folks can spend with gay abandon while the RBA keeps squeezing mortgage holders to reduce aggregate spending to a sustainable level. People that have fully paid off their property also tend to be older and wealthier, and therefore often disproportionately contribute to spending.
There are several alternative policies at-hand to combat inflation. Most of what we'll talk about falls to the government through fiscal policy (the RBA controls the monetary policy).
Price Caps
Price caps seem like an intuitive way for governments to combat inflation. After all, vendors and businesses have to make the decision to increase prices, so why not just limit how often and by how much? This is something the Australian Council of Social Service (ACOSS) has been pushing for a while.
"ACOSS is urging the government to tackle inflation directly instead of relying on the blunt instrument of interest rate rises," ACOSS CEO Cassandra Goldie said in August 2023.
"This includes coordinating the better regulation of rents…and preventing some businesses in private market sectors from using their monopoly positions to keep lifting prices."
Caps on rent increases have been introduced by several states, while there has been intense scrutiny recently on alleged price gouging from the major supermarkets. As of February 2025 the Greens are proposing a cap on the price of 30 essential items, like bread, milk and nappies.
However, AMP Bank Chief Economist Dr Shane Oliver told InfoChoice price caps can have unintended consequences.
Blockquote: "Price caps usually have the effect of reducing supply; capping the price of something is less incentive to supply that product," Dr Oliver explained.
This is essentially what happened in Argentina on and off over the years. Artificial scarcity of a product generally leads to higher prices for that product as demand outstrips supply. Go figure.
Increase Taxes
It likely wouldn't be very popular, but increasing taxes is another potential means to take money out of people's pockets and decrease spending. It would arguably be more fair than rate hikes, since the entire tax paying population would be affected, not just people paying off mortgages.
There are a couple of different ways this could look:
Increase income tax
When most people hear 'increase taxes' they intuitively assume that means higher income tax. This could mean either increasing the marginal rate (say 40% instead of 30% for earners between $45,000 and $135,000) or changing the earnings thresholds.
However, even with Australia's progressive tax rates, people of more modest means might end up shouldering much of the burden. If you're on $70,000 and you have to pay 2% more each year in tax, that might still be a bigger imposition than an 8% increase on someone earning $300,000.
In addition, certain groups pay no income tax, such as retirees, yet still spend and contribute to the inflation problem. Increasing taxes for both businesses and individuals can also incentivise more people to deduct their income to avoid paying more tax.
Increase taxes on spending
Alternatively, the government could increase taxes on spending like the GST or excises on select goods like fuel or cigarettes. As a means to combat inflation, this obviously isn't perfect, given the extra tax burden would likely be passed on to consumers which would initially increase prices. However, it would still almost certainly reduce household spending eventually, and could also help improve the efficiency of the tax system.
An OECD report in 2023 found Australia is over reliant on income tax and that future revenue raising should focus on alternative sources of taxation. Thinktank the Grattan Institute has long called for an increase to consumption taxes. Its modelling in 2015 found increasing it to 15% (which is similar to some European countries) would add more than $27 billion to tax revenues.
At the same time, increasing the GST for example might disproportionately affect lower income families that have to spend a higher proportion of income than wealthier counterparts.
Reduce Government Spending
Alternatively, state and federal government might decide to cut back on its own level of spending. Per the most recent national accounts, the Australian Government sector is projected to spend about $730 billion over the 24/25 financial year. That's a hefty chunk of overall economic activity, so substantially cutting down could help to curb excess demand.
Returning to Argentina, in 2024 President Javier Milei was elected partly on the back of his promise to take a 'chainsaw' to government spending to help curb inflation. As of January 2025, his government has cut back spending by about 30% - a target that's also been set by Elon Musk's new Department of Government Efficiency (DOGE) in the US.
However, the flipside is that government cutbacks often translates to public employees losing their jobs. It's estimated the Milei administration has laid off more than 30,000 people from the Argentinian Government, so it isn't exactly a magic cure.
There are also plenty of examples of Australian state and federal governments pushing major austerity measures in recent memory. In 2012, Campbell Newman's Queensland Government cut about 14,000 public service positions to get costs under control, while Prime Minister Tony Abbott made major cuts to welfare, social services and public sector jobs in the 2014 budget. Both were wildly unpopular, which probably makes future serious spending cuts to address inflation less likely.
Quantitative Tightening
The above policies would all shift some of the impetus for fighting inflation from the RBA to the state and federal governments. The RBA though has another lever it can (and does) use to combat inflation: Quantitative Tightening
To stimulate the economy, the RBA can enact quantitative easing, which it did in 2020 to pull Australia out of the Covid 'abyss' as then-governor Dr Philip Lowe called it. This basically means the RBA buys long term securities, often government bonds on the secondary market, to inject liquidity into the financial system.
This is what it means when people say the RBA 'prints money'. They aren't literally printing money. Some people have questioned whether it might have long term inflationary effects. After all, that money is now floating in the system and has to go somewhere.
In 2022, the QE cycle finished. In that two years, the RBA bought about $4-5 billion a week in secondary government bonds, giving the government lots of funny money to do stuff with, including things like JobKeeper and enhanced JobSeeker, along with a lot more.
The end result was the RBA doubled its balance sheet to about $640 billion.
After this, the RBA entered what's called its 'Quantitative Tightening' phase - selling those long term assets back to the market. This decreases the money supply, which is another way that inflation can moderate.
Since peaking in March 2022, the value of 'Australian dollar investments' held by the RBA has decreased 45%. However, the current value ($309 billion) is still higher than it was at the start of 2021.
In the minutes from the December 2023 monetary policy decision, the Board decided the "approach of holding bonds to maturity remained appropriate." Too dramatic a sell off could disrupt the bond market, which could have a significant impact on equity markets and the broader economy, so it's a fine balancing act.
What's the Verdict?
Many people justifiably feel that interest rate hikes aren't fair. In 2025, many Australians are having to make serious sacrifices across the board to make their mortgage repayments. The YourMortgage Home Loan Insight Report in January 2025 found about 15% of Australian mortgage holders now have regular expenses that exceed their income, while 30% had cut back on essential spending like groceries or electricity.
Meanwhile people that have already paid off their property aren't really affected.
However, it's important to recognise that pretty much any policy, fiscal or monetary, means some sort of trade off, and likely will impact some groups more than others. Many of the alternatives rely on governments being bold with fiscal policy, such as cutting spending. This can be unpopular, too, and with election cycles, governments generally aren't wont to do anything too drastic.
Whether it's cash rate hikes, government cutbacks or even quantitative tightening, policies to combat inflation have to suppress economic growth. This can be like giving a child gross cough medicine - it's good for them but won't go down well.
Picture by Benjamin Wild on Unsplash
