Peter Martin | Why RBA governor Phillip Lowe wants to damage the economy more

Home prices have been climbing for three straight months - in March, April and May - instead of continuing to fall as they had been since the Reserve Bank of Australia (RBA) began pushing up rates in May 2022, a point the bank notes in its latest statement.

Employment, which in November the RBA predicted would grow 1.4 per cent this financial year, is instead growing at an annual pace of 2.9 per cent. In April, Australians worked more hours than ever before.

These aren't signs of a depressed economy, and the Bank wants to depress the economy further to ensure it gets inflation down to where it wants it to be.

The governor's written agreement with the treasurer requires him to deliver an inflation rate of 2-3 per cent on average, over time.

Parts of the economy are slowing. The statement refers to a "substantial slowing in household spending" (and Wednesday's national accounts are likely to be grim) but the RBA's concern is that the slowdown is uneven. It says while some households are "experiencing a painful squeeze", others have "substantial savings buffers".

Those experiencing the squeeze are the 35 per cent of households that are mortgaged. The 31 per cent who rent aren't doing too well either. By contrast, many of the 31 per cent that own outright are doing well indeed.

Since the RBA began pushing up rates in May 2022, the typical interest rate on a new mortgage has doubled - climbing from 2.7 per cent to 5.4 per cent, adding roughly $1000 per month to the cost of servicing a $600,000 mortgage. The latest decision will add a further $90. And yet home prices are turning back up.

The RBA has pushed rates to a new 10-year high - and hinted strongly it will push them up again, saying "further tightening" might be required - not because it doesn't think the economy isn't slowing overall, but because it wants to make sure it keeps slowing enough to keep inflation heading down.

Inflation was 7 per cent in the year to March, and 6.8 per cent in the year to April. The RBA wants to get it down to its forecast of 6.3 per cent for the year to June and to its forecast of 3 per cent two years after that, and while it looks as if things are on track, it isn't yet sure.

If it has to, it is prepared to push Australia's unemployment rate up from 3.7 per cent to 4.5 per cent by late next year, putting perhaps an extra 100,000 people out of work. That's what its board minutes predict.

It's a decision Treasurer Jim Chalmers says many Australians will find "difficult to cop". The RBA's job, in Chalmers' words, is to "squash inflation without crunching the economy".

He could have added that Lowe is running out of time. Unless he gets an extension, his six-year term as RBA governor ends in September. That gives him just three more board meetings to make sure inflation is heading back towards the RBA's target of 2-3 per cent before he hands over to his successor.

Lowe will get the official reading on inflation for the year to June on July 27. If it hasn't fallen to the 6.3 per cent the RBA expects, he is likely to increase rates again in August.

Something that doesn't seem to be giving Lowe much grief is Friday's Fair Work Commission national minimum wage decision, trumpeted by the trade union movement as an above-inflation increase of 8.6 per cent.

What the union movement didn't say, but Lowe knows well, is that it is an increase hardly anyone will get. The only people who get the misleadingly-named national minimum wage are those neither covered by awards, enterprise agreements or individual agreements - at a guess only 0.7 per cent of the workforce. So hard are these people to find the Commission says it is "difficult to identify in practical terms any occupations or industries" in which they are engaged.

What their wage rise will contribute to inflation will be next to nothing. The first part (an increase of 2.7 per cent) changes the award wage they are linked to from what the Commission now regards as an inappropriate classification of "C14", which was originally a metal industry training wage, to "C13", which is a non-training wage.

The second part of the increase applies to everyone on awards, some 20.5 per cent of the workforce, which probably extends to 25 per cent if you take into account other workers whose pay is linked to awards. It's an increase of 5.75 per cent, much less than inflation, and on the Commission's calculations should add only 0.6 percentage points to it.

Given that a wage increase of zero wasn't tenable (even the employers asked for 3.5 per cent) it means the wage increase a (low-paid) portion of us get in July won't much impede the RBA's attempts to bring down inflation. The Commission believes employers can afford it. It says profits have "generally been healthy" in the private sector industries whose workers most rely on awards, singling out the accommodation, food services and retail industries who employ one-third of workers on awards and have enjoyed "substantial increases in profits".

The wages of the rest of us who don't rely on awards are largely determined by bargaining power and what we expect, as are the prices businesses charge, and it is here that the Reserve Bank is worried. It wants to dent bargaining power by making sure it dents spending and employment, and it wants to make sure above everything else that high inflation doesn't become entrenched in "expectations", a point Lowe mentions twice in his eight-paragraph statement.

He says if high inflation does become entrenched in expectations, it will become "very costly to reduce later" requiring even higher interest rates and even higher unemployment.