A Melbourne Cup Day interest rate rise is now extremely likely, courtesy of yesterday's inflation spike. It would be the second rate increase in a row and the fifth this year.

Back in 2024 the Treasurer posed for a media photoshoot with artwork of a tamed 'inflation dragon'.

It was an indulgent photo opportunity back then, but it looks downright embarrassing now. Jim Chalmers was happy to pose for the pictures despite economists' warnings that the fight was far from over.

Perhaps next time he should wait until the dragon is truly slain before posing for the trophy shot.

Chalmers can use the excuse of 'international pressures' until he's blue in the face, but Australians facing yet another increase in their mortgage repayments are entitled to ask what he will do to fix the situation.

And this is all happening right when house prices are falling, thanks to Labor's broken election promises on negative gearing and capital gains taxes.

The Treasurer oversees a federal budget approaching $830 billion in annual spending. Yet the difficult business of slowing demand is still being left to the Reserve Bank, which does that by making borrowing more expensive. In other words, by putting up interest rates.

Labor ministers keep telling us they understand households are making difficult choices. They could make a few more themselves, to cut record levels of government spending, in order to put downward pressure on inflation and in turn on interest rates too.

Annual inflation climbed from 4 per cent to 4.3 per cent in September. The Reserve Bank's target is between 2 and 3 per cent. Unfortunately that disparity demands another rate rise.

Another quarter point increase in the cash rate next Tuesday would take it to 4.85 per cent, with the effects of earlier rises still working through the economy.

Families would face higher repayments on top of more pricey essentials. Anyone who has already cut discretionary spending would need to draw further on their savings, find extra work where they can or simply fall behind.

The damage extends well beyond mortgage holders. Money absorbed by repayments is unavailable to spend at local businesses. As customers pull back on their spending, businesses facing higher borrowing costs themselves have less scope to invest, and they can't offer extra shifts or hire new staff.

This squeeze carries the risk of causing rising unemployment. A household struggling to meet its mortgage repayments faces being crushed if mum or dad loses their job.

But allowing inflation to persist carries its own cost. Wages and savings buy less, household budgets remain under pressure and restoring price stability later on can require an even harsher squeeze further down the line.

The pain doesn't go away.

Without stronger spending restraint or an easing of international price pressures, another rate rise becomes a necessary evil.

That is precisely why Chalmers' failures deserve scrutiny. The RBA has a responsibility to contain inflation. The Treasurer has a responsibility to ensure his budget is doing enough to help.

The Middle East conflict has pushed up oil prices, but the RBA has been explicit that international pressures are adding to existing domestic capacity constraints. Australia entered this latest shock with too little room to absorb it. Weak productivity makes the problem even harder to deal with.

Higher interest rates can't produce cheaper oil or immediately deliver more houses and skilled workers. It suppresses spending elsewhere, forcing demand into line with what the economy can supply.

Government spending restraint can help achieve that adjustment while reducing the burden falling on borrowers.

Simply put, if Labor spends less, the RBA doesn't have to put rates up as often, because spending less puts downward pressure on inflation.

Public projects require workers, materials and equipment. When those resources are scarce, which they currently are, governments compete with businesses and households for them, putting upward pressure on inflation.

Deferring low-priority projects can release construction capacity. Removing ineffective subsidies can reduce demand. Funding new commitments through genuine offsets can avoid making the RBA's task harder.

Worthwhile programs still have costs. Governing requires deciding which commitments matter most and which can wait.

To be fair, public demand growth has slowed, private demand has been growing faster and the government has made some changes to spending programs, including the NDIS.

But the response hasn't been sufficient.

The question is how much additional restraint the budget can deliver, how quickly it can take effect and is Labor prepared to make the decisions that are necessary?

We hear promises of more savings to be announced in the December budget update, but claims need to be measured against new spending. Governments can announce billions in savings while adding billions more spending elsewhere.

Labor's political difficulty is obvious. Spending announcements produce grateful recipients and opportunities for ministers to take credit. Cuts produce angry constituencies and uncomfortable interviews.

The benefits of spending restraint are harder to boast about. Nobody receives a letter announcing the interest rate increase that didn't happen.

So Albo and Chalmers find themselves caught between the desire to promise further cost-of-living assistance to win votes, and the economic need to restrain demand.

Targeted help can be justified, but it must be paid for. Governments can't just keep compensating households for rising prices, as they have been doing, without considering whether they are sustaining the spending that helps those prices rise.

It's an economic mirage.

Nor can ministers indefinitely invoke international events as though domestic policy has ceased to matter.

No wonder voters are souring on Labor. They are being asked to accept more pain while waiting for evidence that the government is prepared to make enough difficult decisions of its own.

A fifth rate rise this year would be another warning that inflation remains a serious threat to living standards. The dragon certainly hasn't been slain.