Inflation jumped to 4.6% in the year to March, from 3.7% the month before, in what the treasurer, Jim Chalmers, warned was the start of an Iran war-linked fuel shock that will ripple through the economy over coming months.
With consumer prices now growing at their fastest pace in two and a half years, financial markets and experts are betting the Reserve Bank will hike interest rates for a third straight meeting next Tuesday as officials struggle to manage the nightmare scenario of containing inflation even as growth is expected to slow sharply.
The treasurer ahead of next month’s budget said “inflation is likely to peak higher than this”, even as he reassured Australians that the economy was well placed to navigate the fallout from the war.
“We’ve got low unemployment, we’ve got solid wages growth, and so we’ve got pretty good foundations as we confront this period of heightened uncertainty in the global economy,” he told reporters in Brisbane.
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 the global flow of oil and other key commodities such as fertiliser.
Sign up for the Breaking News Australia emailFuel costs jumped by 33% in the month, according to the latest figures from the Australian Bureau of Statistics, although this was before the 26 cent cut to the petrol excise.
Removing the impact of the large price swings – electricity prices were also up sharply on a year earlier as government rebates expired – showed underlying inflation was steady at 3.3%, an encouraging sign that inflationary pressures beyond the bowser eased in March.
Traders in response trimmed bets of an RBA rate hike next Tuesday to 68%, from 80% before the latest figures, according to NAB.
But Josh Williamson, the chief economist at Citi, said the inflationary “headache” was “about to become a migraine”.
Williamson said inflation would push towards 5.5% by the middle of the year as soaring fuel costs flow through to sectors such as construction and food services.
“The RBA faces a difficult decision, but the persistence of these price shocks necessitates further tightening to manage inflationary expectations,” Williamson said.
The latest figures confirmed cost of living will be at the top of the government’s agenda in the 12 May budget.
Rents increased by 3.7% over the year – faster than wage growth – while homebuilding costs were up 4.5% and likely to accelerate in the months ahead.
Electricity prices dropped in March, but were 25% up on a year earlier when governments were subsidising power bills, the ABS data showed.
Labor has already halved the fuel excise for three months and announced a GST rebate on petrol and diesel that has helped cushion the blow on motorists from soaring pump prices.
Economists, however, warn that further untargeted cost-of-living support risks complicating the RBA’s battle to bring price pressures back under control.
Luke Yeaman, the Commonwealth Bank’s chief economist and a former senior Treasury official, said he expected the budget to include “some additional support for households”.
“But we expect the government to resist the urge to make a big splash. This would risk adding fuel to the inflation fire and heap pressure on the RBA, at a time when the outlook is still very uncertain.”
