The Reserve Bank have revised their inflation projections, suggesting that interest rates are going to remain high for longer than many expected.

This has sent plenty of people into a spin, with media speculating about interest rate armageddon and some economists calling for a recession.

But with inflation still heading in the right direction, cooler heads must prevail as policymakers navigate the tricky economic climate, Australia Institute Chief Economist Greg Jericho said on the latest episode of Dollars & Sense.

“[Inflation] is not dropping as fast as people thought because the previous thinking was probably a bit hopeful.

“Importantly, the long-term trend – where the Reserve Bank thinks inflation is going to go – really wasn’t changed. They still believe it’s going be below three per cent by the end of next year.

“That was what they were thinking in February – perhaps it’s just not going to be as sharp a drop.”

But that’s not necessarily a bad thing, Jericho argued – saying inflation’s fall had been roughly mirroring the pattern leading into the 1990s recession.

“That’s generally not a good thing to try and copy.

Inflation is currently falling at the rate it did during the 1990s … and it is no bad thing if it stops replicating what happened during a deep recession https://t.co/hYJulD3tRf pic.twitter.com/tP0CYJsh7v

— Greg Jericho (@GrogsGamut) May 9, 2024

“Inflation, when it comes down, often can have a tendency to come down really fast – and the problem is it doesn’t actually steady and flatten out at the point you want it to.

“It just keeps going because the economy kind of tanks.”

Despite the risks, some economists have called for significant interest rate increases – even a small recession.

“The reality is that you very rarely get what you desire when you call for a ‘little’ recession.

“Calling for a ‘short recession’ is like calling for a ‘small war’. They don’t stay small, they don’t stay short.

“How can you be so cavalier with people’s livelihoods?”

Dollars & Sense is available on Apple Podcasts, Spotify or wherever you get your podcasts.