As cost-of-living pressures mount, critics argue Australias inflation response is worsening the pain rather than solving the problem, writesDavid Higginbottom.
WHEN THE COST OF LIVING rises, the Reserve Bank of Australia (RBA)'s answer is to raise the cost of living further.
In May 2026, RBA governorMichele Bullock's board voted 8-1 to lift the cash rate to4.35 per centthe third rise of the year in response to an inflation spike driven by global fuel prices and supply chain disruptions that no Australian interest rate decision can possibly fix.
The logic is circular, the instrument is blunt and the people paying the price are the one-third of Australian households with a mortgage.
But the problem is not the governor.
The problem is the machine.
Bullock is operating within a macroeconomic framework taught in universities as a hard science, treated by governments as an objective truth and deferred to by the media as a law of nature.
It is none of these things.
It is a set of theories built on demonstrably false assumptions.
In data science, there is a well-known corollary:Garbage in, garbage out.
When the model is broken, the quality of the data fed into it is irrelevant the machine turns facts into garbage.
An alternative economic model could tackle inflation through fiscal policy instead of interest rate hikes, avoiding the unemployment and financial pain often used to curb prices.
The illusion of science Economics suffers from a profound case of physics envy.
It attempts to apply the rigid mathematics of the natural sciences to the messy reality of human behaviour assuming perfect information, perfect foresight and rational actors who ensure markets automatically return to equilibrium.
None of this is true.
Yet the models treat these assumptions not as simplifying abstractions, but as the literal mechanics of reality.
If the models are so obviously flawed, why does the system assume it will always self-correct? The answer lies in an invisible political assumption: the democratic fix.
Neoclassical economics separates the economy from politics by an artificial wall, assuming that a perfectly neutral, uncorrupted democratic regulator will step in whenever markets fail.
But the landmark2014 Gilens and Page U.S.
studydemonstrates that this regulator may not exist.
Economic elites have substantial, independent impacts on government policy, while average citizens have statistically near-zero influence.
The doctrine of RBA independence rests on this same fiction that monetary policy is a neutral lever with no persistent real-world effects.
Anyone who has watched the Australian housing market over the past two decades knows otherwise.
The policy test: 2008 and COVID-19 When forced to confront reality, the models fail catastrophically.
The 2008Global Financial Crisisand the COVID-19 pandemic provided rare natural experiments.
In standard macroeconomic models, government intervention is a generic input the G in the equation.
The model cannot distinguish between a central bank buying bonds from a hedge fund, a government mailing an untargeted stimulus cheque, or a targeted wage subsidy keeping a worker attached to a firm.
These are treated as identical.
Following both the GFC and COVID-19, central banks engaged inquantitative easingbuying bonds from the private financial sector.
The model assumed this liquidity would flow into productive investment.
Instead, it flowed into equities and real estate.
Research indicates that only about3 to 5 cents of every dollarof asset appreciation feeds through to personal consumption.
The machine turned a crisis response into the greatest upward transfer of wealth in modern history.
Everything changes when governments admit that money does work the way Modern Monetary Theory says it does.
Contrast....
