New economic modelling has found that the overwhelming majority of Australia's inflation problem is being generated from within the country's own borders, piling fresh pressure on the federal government to rein in spending before the end of the year. The analysis, released by the Business Council of Australia, challenges the narrative that global forces are chiefly to blame for the country's persistent price pressures.

What the Inflation Modelling Actually Shows

According to the Business Council's analysis, almost 70 per cent of Australia's Consumer Price Index is being driven by non-tradable goods and services, such as rent, which are largely insulated from international market movements. In practical terms, that means roughly 3 percentage points of the current 4.3 per cent headline inflation rate is the product of domestic demand rather than anything happening overseas.

The findings land at a pointed moment. The Reserve Bank has now delivered five interest rate rises this year, with Governor Michelle Bullock making clear that global oil prices are not the primary target of the central bank's tightening cycle.

"Part of the reason for inflation staying higher for longer is global oil prices," Bullock said following the most recent board decision. "However, I want to be very clear, that we are not tightening monetary policy because of the direct impact of oil prices on inflation. Monetary policy cannot impact global oil prices, rather the tightening in monetary policy is to address domestic capacity pressures."

For the latest context on the Reserve Bank's recent decisions, see our earlier coverage on the Reserve Bank and signs of cooling inflation.

Business Council Calls Out Years of Productivity Decline

Business Council chief executive Bran Black used the release of the modelling to issue a sharp rebuke of government economic management, arguing that years of warnings have gone unheeded.

"The Strait of Hormuz can no longer be an excuse for ignoring problems which are mostly from within our own borders, compounded by years of declining productivity," Black said.

Black pointed to what he described as historically high government expenditure, saying the government had pushed spending to its highest share of GDP in almost 40 years, outside of the pandemic period. He argued this, combined with policies that suppress rather than lift productivity, has created what he called a "doom loop" on everyday prices while holding back real wage growth.

His solution: a hard cap of 2 per cent annual growth in government spending, which he noted would be more than half the rate of spending growth recorded over the past three years. Black claimed that had such a cap been in place over that period, the budget would already be $86 billion better off.

Political Battle Lines Drawn Over Spending Cuts

The modelling has sharpened an existing political divide over fiscal responsibility. Opposition Leader Angus Taylor backed the Business Council's call for spending restraint, drawing a direct comparison between household belt-tightening and what he said the government should be doing.

"You've got to keep government spending below the growth of the economy," Taylor said. "Households are having to tighten their belts, small businesses are having to tighten their belts, the government should tighten its belt."

Acting Prime Minister Richard Marles pushed back firmly, arguing that savings have been embedded in every budget delivered under the current government. He contrasted this with the previous Coalition administration, saying it "literally handed down budgets where there were no savings packages at all."

For more on the shifting dynamics in Australian politics, see our analysis of what recent electoral trends could reveal about the country's political direction.

What Comes Next

With Christmas approaching and the Reserve Bank already deep into its tightening cycle, the pressure on the government to demonstrate meaningful spending restraint is unlikely to ease. The Business Council's modelling gives fresh ammunition to those arguing that monetary policy alone cannot fix a problem that is, by most measures, a domestic one, rooted in spending, productivity and the cost of doing business in Australia.