Three short months ago, Jim Chalmers was off to the races.
"We've got this really welcome and encouraging trifecta," the treasurer said in April.
"We've got real wages growing, inflation has been moderating and we've got the unemployment rate falling … The direction of travel is clear."
No longer. Inflation, recently as low as 3.4 per cent, rose to 4 per cent in May.
Quibbles can be had with whether that monthly figure is really as bad as it sounds. As Mr Chalmers put it, inflation can "zig and zag" on its way down.
But the last few months have been all zig and no zag. Not since December has monthly inflation fallen, and the news is not much better whichever inflation measure you choose.
The cold reality, at least according to the reaction in financial markets, is that any talk of a rate cut has been banished in the near term and another rate rise is very possible, maybe even as soon as August.
That would be painful for those with mortgages and a disaster for the government, whose re-election strategy relies on whether it can make a convincing argument that things are improving.
A 14th rate rise, nearly a year after the 13th, would make that argument harder to mount. That may not be entirely fair – economists tend to think we overstate the government's capacity to shape economic conditions for better or worse.
But governments are quick to claim credit when things go well, which leaves them vulnerable to take the fall when they don't. Could Labor's economic narrative be about to come unstuck?
A closer look at the figures
First, the quibbles.
The May inflation rise was not wholly unexpected and "not quite as bad as it looks," as independent economist Chris Richardson put it.
Monthly figures are volatile at the best of times. But this one was particularly warped because of the baseline it was measured against – May in 2023 – was unusually low.
That meant economists had predicted a figure as high as 3.8 per cent. But the actual figure of 4 per cent was still a nasty surprise.
And it is even more concerning in a recent context where most measures of inflation have been flatlining or even ticking up in the last few months.
And more fine-grained measures show worryingly high inflation in the sorts of categories associated with persistent or "sticky" inflation.
For example, inflation remains higher in services than in goods. Whereas goods prices can fluctuate with things as random as shipping delays or bad weather, services prices are mostly linked to domestic demand and wages, so their persistence is a bad sign.
Also troubling is that local prices are growing faster than the price of imports, another measure which gives us a better flavour of what is happening at home.
It is true that other countries have also experienced upticks, including in Canada, the US and the EU. But all three have lower inflation than Australia.
Forging our own narrow path
And Australia has also set itself a different trajectory.
The RBA has taken a slower, gentler approach to fighting inflation than most other central banks. That fact often gets lost in the domestic debate: our interest rate has not risen as high as in most countries, and our economy has not cooled as much.
This was deliberate. The RBA chose to ease the brakes rather than slam them so that it could tame inflation but also retain a low unemployment rate and avoid a recession.
Governor Michele Bullock defended this strategy in her press conference after the last RBA Board meeting.
"We do feel that there is a genuine narrow path here to bring inflation back down without having unemployment rise very sharply and people lose jobs … So we haven't raised rates as much, that's true.
"We're trying to do it without having a recession. Other countries have made different decisions and think they need a recession to do it. We're trying to do it without [one]."
But the risk of that strategy was always that inflation would linger, and Ms Bullock has always been explicit that the RBA "would not hesitate" to raise rates again if it felt that was happening.
And in its last two meetings, the RBA board has grown more concerned: because of the inflation figures, because the labour market remains "quite strong", and because revised figures last month showed households were still spending more and saving less than was previously thought.
If the board is worried all of that will knock us off the narrow path, it will raise rates again. But that would also risk going too far in the other direction and perhaps even triggering that recession the RBA has tried so hard to avoid.
This precarious balance is what makes the narrow path so narrow. And to make matters more difficult, the RBA can't know if its decision is the right one until it's too late, since rate changes take up to a year for their effects to be fully felt.
Can the government 'manage'?
What can the federal government do about all this?
Its main tool is the budget, where it has a range of options to "cool" the economy to assist the RBA.
In doing so, it has the added advantage that it can be much more targeted than the "blunt instrument" of interest rates. For example, it could trim spending or raise taxes in ways that do not penalise vulnerable households.
But it has the distinct disadvantage that almost every way of doing that would be deeply unpopular.
The result, as the International Monetary Fund has observed, is that the most that can reasonably be expected of most governments is to avoid making anything worse, even if they're not actively helpful.
That is, avoid offering major new spending or tax cuts that could be counterproductive to the central bank's cooling efforts.
The federal government has offered both of those things. But it has done so in a way it argues minimises the risk to inflation.
In the case of the tax cuts, it chose to redistribute cuts that were already planned, and in the case of energy bill relief it argues the inflation effect is smaller because the money is taken directly off power bills rather than put into pockets.
Many economists disagree, but Ms Bullock has given both arguments her tick of approval.
But if the RBA decides it has to raise rates again anyway, the biggest fallout for the government will be political, and any win it hoped to gain on its cost-of-living narrative from tax cuts and bill relief could be swallowed up as households brace to add hundreds more to their monthly mortgage payments.
