Aussie drivers facing $2.46 per litre by late May as new Westpac report warns of inflation surge
Economists warn Australian oil prices could rise to $2.46 per liter by the end of May as global energy uncertainties and volatile conflicts in the Middle East continue to weigh on inflation.
Westpac economist Justin Smirk said ongoing geopolitical tensions, including an all-out Israeli and US airstrike on Iran, had prompted the bank to model multiple scenarios to gauge the impact on fuel prices and inflation.
“Uncertainty is inherent in economic forecasting, and we often face a situation where the most likely outcome is not always the desired outcome,” Mr. Smirk said in a video update on Thursday.
Westpac’s scenarios range from a pre-conflict baseline, a one-month closure of the Strait of Hormuz with minimal damage, to a two-month closure with some infrastructure damage and slow recovery.
Current forecasts were based on a two-month closure scenario, but the recent two-week ceasefire and the alleged reopening of the Bosphorus could depress energy prices if it continues.
“Now that’s clearly good news and a risk upside relative to the baseline we outlined last week if the ceasefire holds,” Mr Smirk said.
“A faster opening of the Strait of Hormuz could result in energy prices being lower than we currently estimate.”
Despite the potential uptick, crude oil is expected to average around US$120 per barrel in the June quarter, while Brent is currently trading below US$100 per barrel.
Despite the reductions in Australian fuel tax, unleaded gasoline is expected to peak at $2.46 per liter at the end of May, and will increase by a further 26 cents as consumption tax returns to normal.
The impact on inflation is expected to be significant.
Westpac predicts consumer prices could rise by around 1.5 per cent in the March quarter, with a further 1.9 per cent rise in June, taking annual inflation to around 5.4 per cent.
Businesses are passing on fuel costs more quickly than usual, sometimes through fuel surcharges or outright price increases, raising concerns about core inflation.
Core measures are expected to rise to 4 percent by September and remain high until the end of the year, remaining near the upper end of the Central Bank’s target range.
While fuel prices are expected to increase by 35 percent in March, the monthly inflation rate is expected to reach around 6 percent in May or June, while monthly core inflation is expected to peak around 4 percent in the second half of the year.
On monetary policy, the RBA is expected to respond with 25 basis point interest rate increases in May, June and August, but this depends on whether the ceasefire holds and whether energy prices fall faster than expected.
“Then the conflict could flare up again,” Mr. Smirk said.
“Supply chain disruptions may last longer, energy prices will rise, and we’re seeing larger paths to final prices.”
