Increasing Petrol Prices Expected to Impact Domestic Inflationary Pressures

Why It Matters

A surge in petrol prices threatens to push Australian inflation beyond the RBA’s target, likely prompting tighter monetary policy and squeezing consumer spending.

Key Takeaways

• Global oil prices surged 40% to $120 per barrel.
• Unleaded petrol expected to reach $2.30 per liter soon.
• Fuel weight in CPI could lift headline inflation by one point.
• RBA may face inflation above target, risking tighter monetary policy.
• Underlying inflation impact remains uncertain, depends on oil price duration.

Summary

The interview focused on the sharp rise in global oil prices and its immediate effect on Australian petrol costs, highlighting a potential spike in domestic inflation. Over the past ten days, crude oil jumped nearly 40% to around $120 a barrel, prompting forecasts that unleaded gasoline could hit $2.30 per litre by month‑end. Because fuel accounts for roughly 3.5% of the consumer‑price index, this surge could add about one percentage point to headline inflation, pushing the rate above 5% in the June quarter.

Economist Pat Bermane explained that the CPI weight of auto fuel means the price shock will feed directly into headline figures, while the Reserve Bank of Australia (RBA) worries about breaching its 2‑3% target. He noted that while the headline impact is clear, the effect on underlying or core inflation remains uncertain and hinges on how long the war‑driven oil price rally persists. A sustained rise could embed higher costs into broader price dynamics, forcing the RBA to consider tighter policy.

Bermane warned, “the risk that it gets passed on to underlying inflation and domestic prices” could compel the central bank to act, even though the current assessment places that risk as low. The RBA also faces a delicate balance between curbing inflation and supporting a sluggish growth outlook, especially if higher fuel costs dampen consumer spending.

If inflation stays above target, the RBA may tighten interest rates, raising borrowing costs for households and businesses. This could slow economic activity further, making the duration of the oil price shock a critical factor for policymakers and market participants alike.

Original Description

Westpac economist Pat Bustamante said petrol prices are expected to stay elevated and could increase to about $2.30 per litre by the end of this month, pushing up headline inflation in the process.

“Obviously, that's going to have an impact on domestic inflationary pressures,” Mr Bustamante told Sky News Australia.

“By the end of the June quarter, we could see headline inflation above five per cent.”