Background: The Reserve Bank of Australia (RBA) plays the role of the referee for the Australian economy. Eight times a year, the RBA board checks whether inflation is behaving, alongside other key indicators like unemployment, productivity and economic growth. If inflation runs too hot or too cold, the RBA can step in by adjusting the cash rate.

What happened: The latest Consumer Price Index (CPI) showed inflation jumping from 3.4% to 3.8% in the December quarter, which is well outside the RBA's 2–3% target range. So all four banks and leading economists expected the RBA to make a move. And make a move they did - the RBA lifted the cash rate by 0.25%, taking it to 3.85%, in an effort to stop inflation from running out of control.

What else: The problem for the RBA is that despite cost-of-living pressures, household spending continues to rise. That disconnect between “tough times” and rising consumption has become a growing concern for the RBA as it tries to rein inflation back in.

What's the key learning?

💡Welcome to the great Aussie money-paradox. Everyone says they’re struggling, but the receipts say they’re spending. Household spending grew 6.30% in November year over year - that's nearly double the pace of the previous year.

💡There are a number of reasons for the spending. First, last year’s three rate cuts gave mortgage holders breathing room. On the other hand, the unemployment rate is still at 4.1%, which is low historically.

💡And the final nail in the coffin is credit card spending, which has jumped 8.6%over the past year. So it seems like many households are relying on borrowing to maintain their lifestyles. And clearly, this is a trend the RBA is now trying to cool with higher rates.