The RBA isn't trying to stop inflation. So don't expect prices to fall

What is the Reserve Bank trying to achieve by raising interest rates?

In recent days, a video has done the rounds on social media of someone asking for help to understand what the RBA is up to. This is an edited version of what they said:

"If inflation means that prices are higher, does the RBA expect businesses to start reducing prices to make inflation decrease?

"Because I don't see businesses ever reducing prices. I've never seen a company say that they'll permanently reduce their prices.

"So how does inflation actually get fixed?"

It was a great question, but a little confusing. So let's untangle it and answer it.

Inflation is baked into the system

Many people may not know this, but the RBA actually wants consumer prices to rise by 2.5 per cent every year.

Loading...That's what the RBA's "inflation target" is.

So if prices are rising by more than 2.5 per cent, the RBA tries to slow the pace at which prices are rising.

If prices are rising by less than 2.5 per cent, the RBA tries to get them to rise a bit faster.

The RBA does not want zero inflation. It wants prices to rise by 2.5 per cent every year on average.

What does that mean in reality? It means that once prices rise, they're not coming down.

If prices rise by 2.5 per cent this year, by 2.5 per cent next year, and by 2.5 per cent the following year, prices will clearly be higher after three years, right?

That's the dynamic that slowly pushes prices higher over time. Inflation is built into our system.

It explains why we all feel like we're in a rat race, why we're always chasing wage increases to keep up with constantly rising prices.

Prices rise at different rates over time

The Bureau of Statistics could help people to understand this phenomenon much better if it presented inflation graphically in a more intuitive way.

It should present inflation in a graph like this, because the blue line shows what actually happens to prices over time:

And it reflects how the human brain thinks about inflation.

In Australia, consumer prices are always rising when the economy's growing, but sometimes prices rise at a faster pace, and sometimes they rise at a slower pace.

And the blue line in the graph captures that phenomenon too.

For example, when the blue line steps up sharply, that's a period when prices have risen quickly.

When the steps are smaller, that's a period when prices have risen slowly.

So, the graph makes intuitive sense. It shows how the general price level in Australia's economy is always rising over time, but that it rises in fits and starts.

Is this graph confusing?

But look at how the ABS presents inflation in graphical form on its website:

It requires people to think their way through multiple analytical steps without telling them how to do it.

For example, that ABS graph isn't telling you that prices are rising or falling, as you might assume.

It's telling you that prices have risen constantly in recent years, but sometimes they have risen at a faster rate (when the blue line goes up) and sometimes they have risen at a slower rate (when the line goes down).

If nobody told you that, you'd be forgiven for thinking that the falling line meant falling prices.

It's not very intuitive. One wouldn't be surprised if that graph is contributing to the public's confusion about inflation.

The large increase in prices in recent years

Another reason why the alternative graph is a good way to represent inflation is that it helps us to see how much prices have risen over a specific time period.

For example, when RBA governor Michele Bullock says that consumer prices have risen by "20 to 25 per cent over the last few years", this is what she's talking about:

And we can use the graph to tell another intuitive story about inflation by zooming in for a granular look at the blue line.

When we do that, we can see how prices stepped sharply higher in 2022 and 2023 (when inflation got really bad a few years ago).

We can see how prices stepped up more slowly in 2024 (that's when inflation eased considerably, which led to the RBA cutting rates three times in 2025):

And we can see how prices stepped up noticeably again in late 2025 and into 2026 (which explains why the RBA has been lifting rates again this year).

How the RBA is trying to fix inflation

Which brings us back to the question at the top of this article.

The RBA isn't trying to compel businesses to cut their prices to bring inflation down. It's trying to engineer a situation in which businesses stop raising their prices so quickly.

That's it.

The RBA governor has acknowledged that consumer prices have risen more than 20 per cent in recent years and they won't be returning to their old, lower prices.

But she says she wants prices to rise much more slowly for a while.

That's how the RBA plans to "fix" inflation.

The graph below shows how consumer prices would have risen by 8.85 per cent in the last five years if they had kept rising at their 2014-2019 rate, but how they're currently 24 per cent higher.

That's what the RBA is talking about when it says the growth in consumer prices has to slow back down to a less disruptive pace.

Now, it knows it can't do anything to stop inflation hitting Australia from overseas (higher fuel prices due to war in the Middle East) and from climate-related shocks to food prices and insurance premiums.

But it's still lifting interest rates to make financial conditions a little bit tighter in Australia, to slow economic activity a bit more, and to increase unemployment a little bit more (yes, that's true), so local businesses can't lift prices by more than 2.5 per cent a year in coming years.

It knows it's flirting with triggering a recession by doing so, but it thinks it's necessary.

And if the ABS published more intuitive graphs that showed how consumer prices are typically always rising when the economy's growing, it would help Australians to better understand that inflation is ever-present.

It's the pace of inflation that concerns policymakers, not inflation itself.