‘Muddying the waters’ is a common strategy in politics. It entails finding a key fact or piece of information that can scuttle an attack line or confuse an issue.

This is probably the best framework to assess the December 2024 Consumer Price Index (CPI) numbers released by the ABS.

The key figure is the CPI ‘trimmed’ mean, a measure of inflation that excludes volatile items. For example, it is not influenced by the Albanese government’s decision to subsidise household power bills. As such, it provides insight into more persistent drivers of inflation.

In December, the trimmed CPI fell from 3.6 per cent in the September quarter to 3.2 per cent. This indicates a downward trend towards the target band of 2-3 per cent, leaving room for the RBA to cut interest rates at any time.

Even if continued low unemployment prevents an actual rate cut before the federal election, the inflation numbers will give Labor something positive to discuss.

Interest rates have long been a serious political liability for Labor. Historical data clearly shows that Labor governments tend to oversee higher interest rates than Coalition governments.

For instance, since 1976, the average mortgage interest rate for an owner-occupier housing borrower in Australia (with a variable rate loan) has been 8.87 per cent.

In that period, Labor governments oversaw an average rate of 10.78 per cent, compared to 7.45 per cent under the Coalition.

There are qualifications to this analysis. The underlying data comes from a statistical series published by the Reserve Bank of Australia (RBA) known as lending ‘indicator’ rates. Indicator rates do not account for the practice of interest rate ‘discounting’ in loan contracts.

Many, perhaps most, housing borrowers negotiate discounts to the benchmark (indicator) rate.

The average discount has tended to increase over the years due to heightened competition in housing lending. Consequently, the benchmark rate has become less representative of actual rates paid, particularly over the past two decades.

Another criticism of this statistical averaging approach over such a long period is that it does not account for differences in monetary policy regimes, which impact interest rate levels.

Since its formal adoption in 1996, the Reserve Bank has pursued an inflation-targeting approach. This entails influencing short-term interest rates to keep inflation within a target range of 2–3 per cent.

This policy shift helped contain price rises for about 25 years. Even if we use 1996 as a statistical breakpoint, the conclusion that interest rates have been lower under Coalition governments remains unchanged.

Since 1996, Labor governments have overseen an average mortgage rate of 7.36 per cent, compared to 6.39 per cent under the Coalition.

A similar result is observed with business interest rates, particularly small business rates. Business rates are likely more accurate representations of actual rates paid than housing indicator rates, as business lending is less competitive and discounts are less common.

Since 1976, the small business variable overdraft rate has averaged 10.7 per cent. Under Labor governments, the average has been 12.86 per cent, compared to 9.19 per cent under the Coalition.

The trend continues in the post-1996 period: Labor governments have averaged 9.98 per cent, while the Coalition has averaged 8.45 per cent.

Even with notoriously rigid and high standard credit card interest rates, a difference exists. Under Labor since 1996, credit card rates have averaged 19.4 per cent, compared to 17.78 per cent under the Coalition.

It could be argued that these differences in rates are coincidental. Interest rates in Australia largely reflect global trends, and differences may emerge regardless of the policies adopted.

One way to address this issue is to compare Australia’s interest rates over time with an international benchmark, such as interest rate levels in the United States.

A useful comparison can be made by examining trends in the rates influenced by central banks for monetary policy purposes.

In Australia, this is the Overnight Cash Rate (OCR). In the US, the equivalent is the Federal Funds Rate (FFR).

Since 1976, the OCR has averaged 6.89 per cent, compared to the FFR at 4.7 per cent. While there are exceptions, Australia typically has higher official interest rates than the US, with an average differential of 2.18 percentage points (pps) over the last 49 years.

Is the differential between the OCR and the FFR greater under Labor governments?
The data suggests it is.

Since 1976, the difference between the OCR and the FFR under Labor governments has been 3.9 pps, compared to 0.91 under the Coalition.

Since 1996, Labor governments have overseen a differential of 2.82 pps, compared to 1.05 under the Coalition.

It is not entirely clear why interest rates are typically higher under Labor governments. A tendency towards higher government spending, which puts upward pressure on inflation, is likely a significant factor. Increased inflationary pressure leads to higher interest rates.

Regardless of the reason, the data is clear enough to allow Dutton to credibly claim that interest rates will likely average less under him than they would under Labor.

This is a powerful argument. However, the latest CPI numbers give Labor some statistics to help muddy the waters.

Nick Hossack is a public policy consultant. He is former policy director at the Australian Bankers’ Association and former adviser to Prime Minister John Howard.

This is not intended as, and does not constitute, financial advice.