In announcing the seventh consecutive monthly interest rate hike yesterday, RBA Governor Lowe was talking tough: “The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

“Whatever is necessary” is code language for: “We will continue with this crusade even if it means a recession.”

The Bank’s tough talk is justified by their theory that expectations of inflation literally cause inflation. More technically, in the orthodox economic theory of the “expectations-augmented Phillips curve,” the real economy cannot operate beyond its “natural” or non-accelerating inflation rate of unemployment, regardless of what inflation is.

In that world view, it is important for the central bank to have “credibility” about its commitment to keep inflation at its target, no matter what. Tough talk like this helps to “anchor” public expectations of inflation and hence makes it easier to bring inflation down.

But what if that’s not actually what causes inflation? What if the power to set prices causes inflation, and people with that power continue to use it anyway?

Is petrol selling for $1.85 per litre because people expected it? Or because the petroleum industry has the power (given how we have organized our energy system) to charge it?

And are wages growing at only 2.6% (latest ABS data) because that’s all the inflation workers expect? Or is it because workers don’t have the power – despite historically low unemployment and accelerating inflation – to win any more than that?

Of course, the RBA worries about some expectations more than others. Lowe’s 769-word public statement yesterday made 9 separate references to wages, labour costs, labour shortages, and tight labour markets. It didn’t mention profits once. Maybe it should have: ABS data show that in the last year (as inflation took off), corporate profits per unit of output grew 21%. That’s seven times faster than unit labour costs. And seven times higher than the upper band of the RBA inflation target.

Profits influence prices as much as, or more than, wages. But the Reserve Bank only looks to the workers’ side of the street when warning Australians to tighten their belts.