Treasurer warns inflation could go higher from here
Labor treasurer Jim Chalmers (pictured) has put the blame for today’s chunky inflation print squarely at the feet of the ongoing US-Israel-Iran war.
Discussing the 4.7% annual inflation uplift in a Brisbane press conference, Chalmers said: “These numbers show that Australians are paying a hefty price for war in the Middle East. These are the costs and consequences of a major conflict on the other side of the world.”
Transport costs soared by 8.9% in March, reflecting higher oil prices as the Strait of Hormuz blockade slashed global oil supply by a fifth.
Brent Crude futures, the benchmark for global oil prices, remained above US$100 per barrel throughout March. Although prices eased in April amid hopes for peace talks between the warring nations, they have since climbed back above US$110 per barrel at the time of writing.
Chalmers warned of more pain to come, saying: “The tick up in the monthly headline data today was driven by the conflict, and this war could drive inflation up even higher before it comes back down again.
He said treasury’s expectation is that inflation is likely to peak higher, but analysts “are still finalising their forecasts ahead of the budget next month”.
Chalmers took the chance to tout Labor’s actions in reducing fuel costs: “For the next couple of months, our fuel excise cut has been a very important factor, taking some of the sting out of fuel prices, and that’s reflected in the movement in fuel prices. We’ve seen petrol and diesel prices fall by at least 70 cents (per litre) in most capital cities, and this shows how important that fuel excise relief is.”
Chalmers said “an enduring end to this war in the Middle East can’t come soon enough”.
May rate hike incoming
Although today’s inflation print was slightly softer than expected, “we continue to expect the RBA to increase interest rates by 25 basis points at its May meeting”, ANZ economist Madeleine Dunk said.
Annual underlying inflation is sitting above the top of the RBA’s 2-3% band, and fresh cost pressures are building. “With additional price pressures expected to come through due to higher fuel and other costs, the RBA is likely to remain cautious around the inflation outlook,” added Dunk.
Dunk warned that inflation could peak as high as 5% before the cycle turns. “Anecdotes suggest businesses’ costs have lifted, particularly in areas like agriculture and construction, and the latest NAB business survey showed a sharp pickup in purchase costs,” she said.
VanEck’s head of investments and capital markets Russel Chesler expects inflation to move even higher in April.
“Many suppliers held off increasing prices in March, food prices are expected to continue to increase with rising fuel and fertiliser costs forcing increases in staples like bread, milk and fresh produce. Coles has increased its own-brand milk prices by 20 cents a litre after being lobbied by dairy farmers,” he said.
“We also expect wages to start reacting to rising inflation. Fair Work is expected to release its decision on the minimum wage increase, which flows through to about 50 per cent of wage earners, early in June.”
An ‘ouchy moment’
Nicola Powell, chief of research and economics at Domain, called the inflation print an "ouchy moment" – a re-acceleration that, while largely meeting expectations, still signals significant ongoing pain for Australian households.
Powell flagged the real possibility of inflation hitting the mid-5% range in coming months, making April's data a key one to watch. She noted that inflation was already re-accelerating before the escalation of the Middle East conflict, meaning the energy shock is layering additional pressure onto a pre-existing problem.
Unfortunately, the RBA can only do so much. “There is little the RBA can do to directly offset a global (energy) shock, which is what we're experiencing at the moment,” said Powell. "It will help, but it will mainly do that by supporting the Australian dollar rather than actually reducing fuel costs.”
With a further RBA hike at the next meeting viewed as near-certain, Powell urged Australians to brace for one, possibly two, more rate increases this year.
