Reserve Bank governor Michele Bullock has warned Australia’s inability to produce the goods and services the economy demands risks causing a stagflation crisis.

Australia’s productivity, based on economic output for every hour worked, plunged by 0.6 per cent in the March quarter, which was the worst result over three months since mid-2024.

Ms Bullock told the Senate economics committee on Thursday that poor productivity was linked with higher inflation if economic growth above 2 per cent a year tested the capacity constraints of firms supplying those goods and services.

“Yes, concerned and we can’t grow any quicker than supply side allows us,” she said.

“You can’t get any growth in real incomes if you don’t have productivity growth but that’s not something we can control; all we can do is set policy appropriately.”

Sustained poor productivity can also lead to inflation and unemployment both being high at the same time, a situation known a stagflation, which the RBA chief admitted was a problem under questioning from Nationals leader Matt Canavan, a former Productivity Commission economist.

“It depends on what you define as stagflation but what I can say is that we are seeing the trade-off between inflation and growth go the wrong way,” Ms Bullock said.

“Inflation and unemployment go the wrong way. For every level of unemployment, what we’re experiencing is higher inflation.

“That’s not a good thing, obviously, because inflation is bad for everyone in the economy.”

Australia’s headline inflation rate of 4.2 per cent in April marked the ninth month of the consumer price index being above the Reserve Bank’s 2-3 per cent target.

The unemployment rate of 4.5 per cent for that month was also on the higher side of full employment, which means the RBA would be simultaneously failing on its dual mandates of a low jobless rate and low inflation if it went much higher.

Ms Bullock noted Treasury and the Reserve Bank had differing forecasts on inflation and economic growth.

“We talk to Treasury, but we do have a difference of opinions on some things and one of the things I think is on the gap between aggregate demand and aggregate supply,” she said.

“We just have to take fiscal policy as given and we do.

“The extent to which our forecasts are slightly different from theirs, plays out in a discussion at the board table and board members are welcome to bring different views and I can tell you different board members bring different perspectives to the board table.”

Australia’s economy grew by 2.5 per cent in the year to March but in May, a week before the Budget, the Reserve Bank forecast public demand would grow by 3.7 per cent in the 2025-26 financial year before slowing to 2.8 per cent in 2026-27.

Sarah Hunter, the Reserve Bank’s chief economist, conceded public demand from government spending would still grow faster than the economy.

“It is faster than we expect. Obviously, it’s a forecast,” she said.

But Ms Bullock declined to blame Labor’s Budget for worsening inflation, even though Treasury is expecting government payments to make up 26.8 per cent of gross domestic product, which outside of COVID is the highest since the year to June 1987.

“The board doesn’t have a view on the Government’s Budget,” she said.

“Fiscal public demand adds to aggregate demand. Our assessment is that public demand relative to our forecasts in May, this Budget is not adding anything further to public demand than it was adding in our forecasts.”

Shadow finance minister Claire Chandler had asked her if the $250 Working Australians Tax Offset, the temporary halving of fuel excise to 26.3 cents a litre until the end of June and the $1000 instant tax deduction would be adding to demand in the economy.