Inflation rises to 4.6%, close to three-year high, after petrol price surge
Updated ,first published
Finance Minister Jim Chalmers has warned the price crunch for the country’s consumers will worsen after new figures showed the war in Iran has pushed inflation to a three-year high and intensified pressure on the Reserve Bank to deliver a third successive interest rate hike on mortgage holders next week.
Ahead of the federal budget, which will reveal the slowdown in the economy and rising unemployment due to the impact of the war, the Australian Bureau of Statistics announced that the 33 percent increase in oil prices helped inflation rise to 4.6 percent in March.
Prices across the economy rose 1.1 percent last month, even before higher fuel costs were fully reflected in the cost of goods and services such as domestic travel and supermarket essentials.
These price increases will be added to the Central Bank’s tightening of monetary policy. If the RBA hikes rates next week, it would mean repayments on a $600,000 mortgage would rise by $300 a month since the start of the year.
Economists expect another rate hike by the end of the year, depending on how quickly the war against Iran concludes and whether high-priced oil will drag the global economy into recession.
Chalmers, who said on May 12 that his budget would be the most ambitious of his five fiscal plans, warned Australians that prices would rise further in the short term as the economic impact of the war spreads.
“Today’s rise in monthly headline data was driven by conflict, and that war could cause inflation to rise further before falling again,” he said.
“Treasury’s expectation is that inflation will probably peak above this.”
If it were not for the increase in oil prices throughout March, general inflation would have fallen to 3.4 percent.
Some prices are driven up by factors beyond war. Beef and lamb prices rose 12 percent and 16 percent respectively, driven by strong demand for Australian products from American consumers.
The increase in gold and silver prices increased the cost of jewelry accessories by 20 percent last year.
Shadow treasurer Tim Wilson said the government had contributed to the rise in prices.
“The government needs to stop pouring debt fuel on the inflation fire because they are the fundamental problem underlying inflation and the underlying pressure that Australian households are experiencing right now,” he said.
The end of state and federal government energy subsidies continues to impact the overall inflation rate; Electricity inflation fell from 37 percent in February to 25.4 percent last month.
Housing construction costs continue to rise; Inflation reached 4.5 percent after rising to 3.7 percent in February.
However, rent inflation continued to decline, falling to 3.7 percent annually. It peaked at 7.4 percent in mid-2024.
Chalmers promised to continue important reforms in many areas, from taxes to budget productivity, despite the economic negativities caused by the war.
Commonwealth Bank chief economist Luke Yeaman, who was previously an assistant secretary at the federal Treasury, said he expected Chalmers to continue with changes to capital gains tax and negative gearing.
He said the property tax reform package would create about $2 billion in extra revenue over the next four years and up to $30 billion over a decade.
“The government will argue that the combined changes reduce the current tax bias towards housing (allowing capital to be allocated to more productive investments) and ease the moderate pressure on housing demand, improving affordability without damaging new supply,” he said.
“These are generally fair arguments, but we judge that the effects on house prices and productivity are likely to be quite modest; the biggest benefits will be higher long-term government revenue and a stronger budget.”
As a result of general inflation, he was wary of market economists’ prediction that it would rise to 4.8 percent.
More importantly, core inflation measurements closely followed by the Central Bank, which meets next week, showed a “moderate” increase of 0.3 percent.
Adjusted headline inflation was at 3.3 percent, the same as last month. The Australian dollar, which touched almost US$72¢ early on Wednesday, fell in figures as the ASX200 rose almost half a per cent as investors gambled on the RBA keeping interest rates steady.
Before the inflation figures were announced, financial markets had increased the probability of an interest rate increase at the Central Bank’s meeting on May 4 and 5 to almost 90 percent. After the data was released, this rate dropped to 70 percent.
AMP deputy chief economist Diana Mousina said the Central Bank had no direct control over oil prices, but higher energy costs were significant as they had strong second-round effects on the economy.
He predicted the bank would continue to raise rates next week, although RBA members are likely to be divided on the decision as they were in March when the cash rate rose to 4.1 per cent.
“Australia already had an inflation problem before the war started – although it appeared to be under control,” he said.
“The RBA’s only effective tool in this context is to slow wider economic activity and reduce demand-driven inflationary pressures, thus helping to offset the flow-on effects from higher energy costs.”
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Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: X or email.
