Latest figures from the Australian Bureau of Statistics show annual inflation climbed to 4.6% in March, up from 3.6% in December, prompting predictions that the Reserve Bank of Australia (RBA) will raise interest rates next week. The increase, the fastest in two and a half years, is attributed to the Iran war-linked fuel shock that is beginning to impact the economy.
Treasurer Warns of Further Inflation
Treasurer Jim Chalmers warned that inflation is likely to peak higher than this, as the fuel crisis ripples through the economy. He reassured Australians that the economy is well placed to navigate the fallout, citing low unemployment and solid wages growth. The international oil price pushed back above $US110 a barrel overnight amid dimming hopes of an end to the US-Israel-instigated conflict that has closed the Strait of Hormuz, a critical artery for global oil and fertiliser flows.
Fuel Costs Surge
Fuel costs jumped by 33% in the month, according to the ABS, although this was before the 26-cent cut to the petrol excise. Removing the impact of large price swings, underlying inflation was steady at 3.3%, an encouraging sign that inflationary pressures beyond the bowser eased in March. However, economists warn that the inflationary headache is about to become a migraine, with inflation expected to push towards 5.5% by mid-year as soaring fuel costs flow through to sectors such as construction and food services.
Market Reactions
Traders trimmed bets of an RBA rate hike next Tuesday to 68%, from 80% before the latest figures, according to NAB. But Josh Williamson, chief economist at Citi, said the RBA faces a difficult decision, and the persistence of these price shocks necessitates further tightening to manage inflationary expectations. The latest figures confirm that cost of living will be at the top of the government's agenda in the 12 May budget.
Cost of Living Pressures
Rents increased by 3.7% over the year, faster than wage growth, while homebuilding costs were up 4.5% and likely to accelerate. Electricity prices dropped in March but were 25% up on a year earlier when governments were subsidising power bills. Labor has already halved the fuel excise for three months and announced a GST rebate on petrol and diesel to cushion the blow on motorists. However, economists warn that further untargeted cost-of-living support risks complicating the RBA's battle to bring price pressures back under control.
Luke Yeaman, Commonwealth Bank's chief economist and a former senior Treasury official, expects the budget to include some additional support for households but warns against making a big splash that could add fuel to the inflation fire and heap pressure on the RBA.
