Inflation is stubbornly staying above the Reserve Bank’s target, but it’s not because Australian consumers are flush with cash, according to Australia Institute Chief Economist, Greg Jericho.

In fact, retail spending figures suggest that people are struggling and further suppressing consumer demand by increasing interest rates could have a detrimental effect on the economy, Jericho said on the latest episode of Dollars & Sense.

“Pretty much since December, inflation has been stuck at that 3.5, 3.6 per cent area.

“Whereas, before that, it had been coming down fairly steadily.

“And so, some economists are getting rather panicky about the fact that inflation is ‘sticky’.”

But that’s not the full picture, Jericho said.

“What I care about as an economist is: are consumers out there spending like mad? And, as a result shop owners are going ‘wow, I’ve got lines around the block – I can raise prices’.

“But what we see in the retail spending figures is that we are not buying much at all.

“That is a real sign that we are not flush with cash, we are not doing well – households are really struggling.”

While some are calling for the Reserve Bank to take further action, further suppressing consumer demand to get inflation below three per cent isn’t a silver bullet, Jericho said.

Clearly the RBA needs to be tougher and raise rates so we get inflation falling like in the US where it is now… ohhttps://t.co/0FDYliFs26 pic.twitter.com/bNbhjvP9K7

— Greg Jericho (@GrogsGamut) May 30, 2024

“The Reserve Bank has a target – and it’s an arbitrary target – of trying to keep inflation between two and three per cent.

“Other countries have different inflation targets.

“There’s no natural law of economics that says once inflation goes below three per cent things are hunky dory.”

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