The two inflations

In macroeconomics, there are two fundamentally different kinds of inflation. The distinction matters because the two kinds have different causes and require different policy responses. Using the wrong tool for the wrong kind of inflation does not fix the problem. It redistributes the pain.

Demand-side inflation occurs when there is too much money chasing too few goods: when the economy is overheating, wages are rising fast, and consumer spending is driving prices up. This is the inflation that interest rate rises are designed to address. By raising borrowing costs, the central bank makes credit more expensive, reduces household spending, cools the labour market, and brings demand back into line with supply.

Supply-side inflation occurs when the cost of producing or transporting goods rises: when a pandemic disrupts supply chains, when a war causes energy prices to spike, when building materials become scarce. Supply-side inflation cannot be solved by reducing demand. When supply is restricted and you reduce demand to match it, you do not fix the supply constraint. You impoverish buyers.

Australia’s inflation episode of 2022 to 2023 was predominantly supply-side. The causes were: COVID supply chain disruption affecting global goods prices from 2020 to 2022; Russia’s invasion of Ukraine in February 2022 causing global energy and food price spikes; and Australia’s reopening from COVID restrictions producing a demand surge into constrained supply.

The Reserve Bank responded by raising rates 13 times.

01The rate cycle: the biggest since 1990

On 3 May 2022, the Reserve Bank of Australia raised the cash rate for the first time since November 2010. The rate had been 0.10 per cent, a record low set during the COVID pandemic to support the economy.

By November 2023, the RBA had raised the cash rate thirteen times, taking it to 4.35 per cent. That was the biggest tightening since the cash rate target began in 1990. Variable mortgage rates surged 69 per cent from May 2022. On a A$500,000 loan, monthly repayments increased by approximately A$1,210 by April 2024 compared to April 2022.

Correction, 29 September 2026. This article called the 2022-23 cycle ‘the fastest tightening cycle in Australian history’, in the paragraph above, in this section’s heading, in a key fact and in its first reference. That was wrong. On the Reserve Bank’s own cash rate table, which begins in January 1990, the 1994 cycle rose 2.75 percentage points in 119 days (17 August to 14 December 1994), about 0.69 points every 30 days, against 4.25 points over 553 days in 2022-23, about 0.23 points every 30 days (THE RORT’s calculation from the RBA table); on the longer interbank cash rate series, rises before 1990 were larger and faster again ¹⁶. What the record supports: the 2022-23 cycle was the biggest tightening since the cash rate target began in 1990, and the fastest since 1994. Its 13 rises and 4.25 points were the most rises and the largest cumulative rise of any single cycle since 1990, though they were not consecutive decisions: the Board held at five meetings inside the cycle ¹⁷. The heading, key fact and reference have been amended.

Update, 29 September 2026. The thirteen rises described here were the 2022-23 cycle, not the end of the story. The Reserve Bank cut the cash rate three times in 2025, to 3.60 per cent (effective 19 February, 21 May and 13 August), then raised it three times in 2026 (effective 4 February, 18 March and 6 May) back to 4.35 per cent ¹⁷. On 29 September 2026 its Monetary Policy Board raised it a fourth time, by 25 basis points to 4.60 per cent, unanimously, effective 30 September ¹⁷¹⁸. That is above the 2023 peak and the highest since late 2011; the four 2026 rises total 100 basis points ¹⁷.

The RBA’s pass-through data shows that neither side got the full 425 basis point rise. Between May 2022 and September 2023 the average outstanding variable mortgage rate increased by around 70 basis points less than the cash rate, while the average rate on total deposits (excluding offset accounts) increased by 325 basis points, around 75 per cent of the rise ⁶. Fixed-rate borrowers were a separate part of the picture: the share of mortgages at fixed rates roughly doubled during the pandemic, peaking at almost 40 per cent in early 2022, and most fixed terms are two years or less. For those borrowers the increase arrived when their fixed term ended.

Correction, 29 September 2026. The April 2026 edition of the paragraph above said the 425 basis point rise ‘translated to approximately 320 basis points in increased mortgage payments for outstanding borrowers’, and that fixed-rate borrowers whose terms expired, mostly during 2023, moved from about 2 to 2.5 per cent onto about 6.5 per cent. The RBA figure it cited was a rise in average outstanding mortgage rates, not payments, and the fixed-rate figures could not be re-sourced, so the paragraph has been rewritten on the RBA’s pass-through measures ⁶.

02The supply-side case

The argument that the 2022–23 Australian inflation was predominantly supply-side is not a fringe position. It is well-documented in the RBA’s own publications and in the academic literature.

The Australia Institute and the Centre for Future Work conducted research finding that the inflation that led to the Reserve Bank raising interest rates was caused overwhelmingly by companies abusing market power to raise prices. This is the corporate margin expansion argument: during a period of supply disruption and generalised price uncertainty, companies with market power raised prices by more than their cost increases warranted.

Update, 29 September 2026. The Reserve Bank’s own analysis belongs beside this claim. In May 2023 it found ‘little evidence’ of a broad-based increase in non-mining profit margins as an independent cause of inflation, while also finding that ‘some highly profitable firms’ among the 200 largest had gradually widened their margins, a trend the RBA dated from 2016 (firm data to the September quarter 2022) ¹⁹. In February 2024 Governor Bullock told Senate Estimates there ‘probably are firms’ using lack of competition, strong demand and ‘the cover of higher inflation’, but, looking at the non-mining sector in aggregate, ‘not evidence of a wholesale increase in margins across the board’ ²⁰. An August 2026 RBA staff article (a staff view, not the Board’s) finds that import prices and business owner returns accounted for a larger share of growth in the household consumption deflator, a consumer price measure, immediately after the pandemic, and that from 2023 to early 2026 the contribution of import prices and business owner returns ‘moderated significantly’, and business owner returns in some quarters ‘dragged on aggregate consumer price growth a little’ (a window that ends before the 2026 war) ²¹. A May 2026 RBA Bulletin judged that margins had ‘only a modest impact’ overall, while the unwinding of earlier margin squeezes in retail and home building ‘accentuat[ed] the pick-up’ in inflation in late 2025 ³⁵. The Australia Institute’s estimate, that rising corporate profits made up more than half of the inflation above the target range between December 2019 and June 2023, is its own analysis ²². The chart at the top of this article, which listed corporate margin expansion (greedflation) as a supply cause, now marks corporate margins as contested, and its 26 per cent income figure is now labelled as the Australia Institute’s estimate for a typical couple with a A$660,000 mortgage.

The ACCC’s supermarkets inquiry confirmed a version of this finding: grocery prices rose 24 per cent over five years; EBIT margins expanded; the regulator found that at least some of the grocery price increases resulted in additional profits. ACCC legal action against Coles and Woolworths for misleading discount pricing covered exactly the period of the inflation peak.

Update, 29 September 2026. The ACCC’s final report, released on 21 March 2025, did not allege price gouging or recommend divestiture ¹³.

The Ukraine war explanation is straightforward: Russia’s invasion in February 2022 caused immediate global spikes in energy and food prices. Australia imports refined fuel and many food inputs. The global energy price spike fed directly into Australian petrol prices, transport costs, and through them into the cost of almost everything. The RBA raising the cash rate did not produce more Ukrainian wheat or more Russian gas.

Update, 29 September 2026. In 2026 the Governor made the same point about a new war. Asked in May about the most vulnerable, she said: ‘The shock with oil prices, there’s nothing we can do about that. And as I said earlier, the interest rate rises will not do anything about that.’ The shock, she said, makes Australians poorer ‘and there is no way out of that’ ²³. She also said the oil shock ‘is not the sole reason’: ‘we had an inflation problem before this’ ²³. What the rises are for, in her words, is ‘to help to contain the domestic inflationary pressures after the inflation due to oil and related commodity prices eases’ ²³.

03The demand element: why the RBA acted

The supply-side critique of the rate rises does not argue the RBA should have done nothing. There was a genuine demand element to Australian inflation. Australia’s rapid reopening from COVID restrictions in late 2021 produced a significant surge in consumer spending into a supply-constrained environment. This demand element was addressable by rate rises.

The RBA’s position, articulated by Governor Philip Lowe throughout 2022 and 2023, was that even supply-side inflation can become entrenched if inflation expectations become unanchored. Workers who believe prices will keep rising ask for higher wages. Companies that believe wages will keep rising raise prices. The rate rises were partly intended to demonstrate the RBA’s commitment to its target, not just to directly reduce demand.

These arguments have merit. The critique is not that the RBA was wrong to act, but that interest rates did most of the stabilising work while the government used its other tools only in part (the 2022 gas cap and the 2022-23 and 2023-24 surpluses, set out below). The 2023 Independent RBA Review acknowledged the importance of fiscal-monetary coordination. It noted the limitations of monetary policy working alone.

Correction, 29 September 2026. This paragraph said the RBA used interest rates ‘as the sole instrument of stabilisation, while fiscal policy remained largely passive’. That left out what the government did do: a $12 a gigajoule cap on new east coast wholesale gas contracts from late December 2022 ³¹ and underlying cash surpluses of $22.1 billion in 2022-23 and $15.8 billion in 2023-24 ³². The sentence has been amended.

04The wrong tool alone: the distributional consequence

When a central bank raises rates to address predominantly supply-side inflation, the mechanism does not work as textbook economics implies. The Australia Institute described it precisely: rate rises were not so much dampening demand from growing incomes as keeping households’ heads below water.

Real wages fell approximately 5 per cent from 2021 by the RBA’s own measurement. Household disposable income fell 6.1 per cent in the year to September 2023, the largest decline of any OECD country. Economist Chris Richardson said the impact on living standards was far greater than anywhere else and larger than anything recorded since 1959.

Update, 29 September 2026. Real wages were forecast to have fallen again. The Reserve Bank’s August 2026 forecast table puts the fall over the year to June 2026 at 0.7 per cent for the real Wage Price Index and 1.2 per cent for real average hourly earnings (forecasts finalised on 5 August; the RBA table does not shade these June 2026 cells as historical data), and it forecasts real wage growth turning positive only from mid-2027 ²⁴.

The combination of falling real wages and rising interest rates is having a double impact on households. It means that the Reserve Bank is not so much dampening demand from growing incomes as keeping households’ heads below water.

The Australia Institute calculated that for a typical couple with a A$660,000 mortgage, the combination of falling real wages and rising interest rates reduced their after-tax, after-mortgage income by 26 per cent in real terms over twelve months. That is not fighting inflation from a position of strength. That is a policy that took households which were already struggling under supply-shock price rises and made their financial position dramatically worse.

The supply-shock did not require borrowers to bear the entire burden of stabilisation. Fiscal tools were available. Windfall taxes on companies expanding their margins during the inflation period would have both raised revenue and dampened the corporate margin expansion that contributed to price rises. Price transparency and consumer protection measures could have moderated the supermarket margin expansion. The government chose not to deploy these tools. Articles 3 and 6 of this series examine why.

Update, 29 September 2026. The government did use other tools in 2022-24: a $12 a gigajoule cap on new east coast wholesale gas contracts from late December 2022 ³¹, and underlying cash surpluses of $22.1 billion in 2022-23 and $15.8 billion in 2023-24 ³². The budget has been in deficit since 2024-25 ($10.0 billion that year, $22.3 billion in 2025-26) ³⁴.

Update, 29 September 2026. The 2026 round puts the same question more sharply. The Reserve Bank’s reasons for its 29 September rise put the widening Middle East war and global energy prices first, with higher fuel prices partly passed through to other prices, ‘in addition to’ domestic capacity pressure ¹⁸. On the Bank’s own split, fuel contributed 0.8 percentage points of March’s 4.6 per cent headline inflation ²⁵; inflation was already above the target band before the war began at the end of February ²⁶²⁷²⁸. The RBA puts the war’s indirect effect on June-quarter trimmed mean inflation, excluding the direct effect of fuel, at ‘a bit more than 0.1 percentage points’ ³³. The government’s own 2026-27 Budget says fiscal policy is ‘better suited than monetary policy to respond to supply shocks, such as the global oil shock’ ²⁹; the IMF’s July 2026 update adds that fiscal policy ‘should avoid broad-based subsidies, tax cuts, and price controls’ ³⁰. Which levers were and were not pulled in 2026 is set out in ‘Is it the only way?’.

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