The Illusion of Control: Why Rate Hikes Won’t Fix Our Inflation Woes

There’s something almost tragicomic about the Reserve Bank of Australia’s (RBA) latest move to hike interest rates in the face of looming inflation. It’s like watching a firefighter try to extinguish a gasoline blaze with a squirt gun. Personally, I think this decision reveals a deeper issue: central banks often mistake their tools for solutions, even when the problem lies far beyond their reach.

The Energy Shock Déjà Vu

Let’s start with the elephant in the room: the energy crisis. History has a way of repeating itself, and the parallels between today’s situation and the 1970s oil shocks are hard to ignore. Back then, the OPEC embargo and the Iranian Revolution sent oil prices skyrocketing, triggering a cascade of inflation, unemployment, and social unrest. Fast forward to now, and the conflict in Iran—coupled with the Ukraine war—is setting the stage for a similar crisis.

What makes this particularly fascinating is how the RBA seems to be clinging to the same playbook from 50 years ago. Raising rates might work for demand-driven inflation, but this isn’t a demand problem—it’s a supply shock. Oil and gas prices are surging because of geopolitical turmoil, not because Australians are suddenly splurging on SUVs. In my opinion, the RBA’s strategy feels like a misdiagnosis, treating the symptoms instead of the disease.

The Expectations Trap

One thing that immediately stands out is the RBA’s obsession with “inflation expectations.” Governor Michele Bullock will likely emphasize how these expectations have become “unanchored,” as if this is the root of the problem. But here’s the thing: expectations don’t exist in a vacuum. They’re shaped by reality, and right now, that reality is grim.

From my perspective, the RBA’s focus on expectations feels like a distraction. It’s as if they’re trying to convince us that if we just believe inflation will stay under control, it will. But what many people don’t realize is that this theory falls apart during supply shocks. Workers can’t simply demand higher wages to keep up with rising costs—not in Australia, where industrial relations laws make strikes and wage negotiations a bureaucratic nightmare.

In the 1970s, wage growth outpaced inflation because workers had leverage. Today, that leverage is gone. During the 2022 oil shock, wage growth barely hit 4.3%, leaving households to bear the brunt of inflation. If you take a step back and think about it, the RBA’s rate hikes will only exacerbate this pain by squeezing household budgets even further.

The Brutal Math of Rate Hikes

Here’s where things get really interesting: the RBA’s strategy isn’t just ineffective—it’s actively harmful. By raising rates, they’re essentially trying to slow economic growth to match constrained supply. This raises a deeper question: is it fair to deliberately put Australians out of work to combat a problem they didn’t create?

What this really suggests is that central banks are often forced to choose between bad and worse. Rate hikes are their go-to tool, but in this case, they’re more like a blunt instrument wielded in the dark. A detail that I find especially interesting is how this approach ignores the structural issues at play, like Australia’s reliance on gas exports and the lack of domestic energy security.

Gas Exporters: Profiteers or Potential Saviors?

Speaking of gas exports, it’s worth noting that not everyone is suffering in this crisis. Companies like Santos and Woodside have seen their stock prices soar as global gas prices climb. While their long-term contracts limit immediate gains, there’s still room for them to capitalize on the chaos.

This raises another provocative idea: what if the government taxed these windfall profits to fund electricity rebates or insulate domestic users from price spikes? It’s a radical thought, but one that could address the inequities of this crisis. After all, why should ordinary Australians pay the price for a conflict driven by decades of geopolitical greed?

The Bigger Picture: A Cycle of Control and Chaos

If there’s one broader insight to take away, it’s this: inflation isn’t just an economic problem—it’s a symptom of deeper systemic issues. The Iran conflict, like the 1970s oil shocks, is rooted in a struggle for control over resources. America’s 1953 coup in Iran wasn’t about democracy; it was about oil. And here we are, 70 years later, still fighting over the same thing.

What many people don’t realize is that these crises aren’t random—they’re the result of choices made by governments and corporations. The RBA’s rate hikes feel like an attempt to impose order on a chaotic system, but in reality, they’re just another band-aid on a bullet wound.

Final Thoughts

As I reflect on this situation, I’m struck by how little has changed since the 1970s. We’re still grappling with the same issues: resource scarcity, geopolitical conflict, and the illusion of control. The RBA’s rate hikes might make policymakers feel like they’re doing something, but they won’t solve the underlying problems.

Personally, I think the real solution lies in rethinking our approach to energy, inflation, and economic policy. Instead of reacting to crises, we need to address the root causes. Until then, we’ll keep chasing our tails, wondering why the same problems keep coming back.