So last week Anthony Albanese, still on his PM’s P-plates, got into trouble for saying the Reserve’s bosses “need to be careful that they don’t overreach”.

Loading

Well, he shouldn’t be saying it, but there’s nothing to stop me saying it – because it needs to be said. The Reserve is under huge pressure from the financial markets to keep jacking up rates, but it must hold its nerve and do no more than necessary.

It’s important to understand that prices have risen a lot in all the advanced economies. They’ve risen not primarily for the usual reason – because economies have been “overheating”, with the demand for goods and services overtaking businesses’ ability to supply them – but for the less common reason that the pandemic has led to bottlenecks and other disruptions to supply.

To this main, pandemic problem has been added the effect of Russia’s invasion of Ukraine on oil and gas, and wheat and other foodstuffs.

The point is that these are essentially once-off price rises. Prices won’t keep rising for these reasons and, eventually, the supply disruptions will be solved and the Ukraine attack will end. Locally, the supply of meat and vegetables will get back to normal – until the next drought and flooding.

Increasing interest rates – which all the rich countries’ central banks are doing – can do nothing to end supply disruptions caused by the pandemic, end the Ukraine war or stop climate change.

Loading

All higher rates can do is reduce households’ ability to spend – particularly those households with big, recently acquired mortgages, and those facing higher rent.

The Reserve keeps reminding us that – because most of us were able to keep working, but not spending as much, during the lockdowns – households now have an extra $260 billion in bank accounts. But much of this is in mortgage redraw and offset accounts, and will be rapidly eaten up by higher interest rates.

Of course, the higher prices we’re paying for petrol, electricity, gas and food will themselves reduce our ability to spend on other things, independent of what’s happening to interest rates. It would be a different matter if we were all getting wage rises big enough to cover those price rises, but it’s clear we won’t be.

The main part of the inflation problem that is of our own making is the rise in the prices of newly built homes and building materials. This was caused by the combination of lower interest rates and special grants to home buyers hugely overstretching the housing industry. But higher interest rates and falling house prices will end that.

Loading

So, while it’s true we do need to get the official interest rate up from its lockdown emergency level of virtually zero to “more normal levels” of “at least 2.5 per cent”, it’s equally clear we don’t need to go any higher to ensure the inflation rate eventually falls back to the Reserve’s 2 to 3 per cent target range.

The Morning Edition newsletter is our guide to the day’s most important and interesting stories, analysis and insights. Sign up here.