If the RBA's right, interest rates may not fall for another year

That's a big change compared to just three months ago. Back in February, the Reserve Bank assumed three rate cuts before the middle of the next year.

Its newly-updated assumptions have interest rates remaining high for the rest of this year, then declining only slowly, with a cut by May 2025 about as unlikely as it is likely.

The assumptions are based on financial market pricing, which the bank says is "the best predictor of the future cash rate path".

What changed the market pricing and the bank's forecasts? Inflation.

That's posing a big challenge for the Albanese government as it prepares for next week's federal budget.

In its statement on Tuesday explaining why it was leaving its cash rate on hold at 4.35 per cent, the Reserve Bank board sharpened its language about inflation. It's now forecasting an increase in inflation later this year and warning that getting it down is proving harder "than previously expected".

The updated forecasts have the annual rate of inflation climbing from its present 3.6 per cent to 3.8 per cent in June and staying there for the rest of the year, before falling back in line with the bank's previous forecast released in February.

Both forecasts have inflation remaining above the bank's 2-3 per cent target band until late 2025, and both have it not returning to the centre of the band until mid-2026.

It's a similar story in the United States, with the expected date of rate cuts blowing out there as well. There, as here, the monthly measure of annual inflation rate remains stuck at 3.5 per cent. In both countries, it's no lower than it was late last year.

The chair of the US Federal Reserve Jerome Powell now says he won't cut rates until he is more confident inflation is heading back down towards his target, adding it is likely to take longer than expected to get that confidence.

So what's Treasurer Jim Chalmers planning to do on budget night next week to give the Reserve Bank more confidence inflation is clearly heading down? Not that much - and certainly not nearly as much as in previous budgets.

Chalmers' opposite number, Coalition Treasury spokesman Angus Taylor, says the Treasurer should "stop the spend-a-thon", by which he means containing growth in government spending to take pressure off inflation. It's advice Chalmers and Finance Minister Katy Gallagher won't be following this time. And not because they don't understand the thinking behind it.

Restraining spending (and pushing up tax) would indeed take pressure off prices. Chalmers and Gallagher could say they've cut $50 billion off spending over the past two years. But a further big cut might push the economy into free fall.

The Australian economy is alarmingly weak. As the Reserve Bank board met on Tuesday, the Bureau of Statistics released its latest estimates of the volumes of goods and services bought from online and physical stores.

The estimates are price-adjusted, which in this case means that while what we spent climbed (a tiny) 0.8 per cent over the year to March, what we bought fell 1.3 per cent. The amount of food we bought fell 1.5 per cent. The amount of household goods we bought fell 1.8 per cent. And the amount we bought from cafes and restaurants fell 2.5 per cent.

The only category in which buying has climbed over the past year was clothing and footwear, and only by 0.3 per cent.

All this has happened in a year in which the Australian population grew by more than 2 per cent - which means the reduced amount of things we have bought has had to feed, clothe and service about an extra 600,000 of us.

Chalmers knows this. It's consistent with the national accounts, which show the amount we've spent and earned per person has shrunk over the past year, in a so-called per capita recession.

The Australian National University's latest ANUPoll finds us more financially stressed than during the depths of the COVID lockdowns.

Twenty per cent of us say we have borrowed money from friends or relatives over the past year, up from 16 per cent during the lockdowns. Meanwhile, 21 per cent have fallen behind on our bills, up from 17 per cent; and 62 per cent of us have cut our spending on groceries and essential items, up from 43 per cent.

It means that a further big cut in government spending - right now - could push us from a per capita recession into an actual recession.

It's why Chalmers said on Monday now was "not the time for scorched earth austerity". He won't slash and burn while the economy is weak.

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After three budget updates in which he has spent less than previously forecast, in next Tuesday's budget he will spend more - at least for some of the years for which he will produce projections.

Gallagher added this week she's been as good as forced to spend more in some areas. Several programs introduced, but not properly funded, by the previous government are set to end abruptly. One is the leaving violence payment, which began as a trial.

In fairness to the Reserve Bank, it too knows the economy is weak. Its updated forecasts released on Tuesday have downgraded expected economic growth to just 1.2 per cent for the year to June and 1.6 per cent for the year to December.

And it knows its 13 interest rate rises to date are yet to have their full effect.

Speaking at a press conference after the board's decision to keep rates on hold, Governor Michele Bullock gave the impression that lifting rates further was still one of the furthest things from her mind.