Prices eased slightly in February before outbreak of Iran war
Updated ,first published
Inflation is on track to surpass 5 per cent by June, with Finance Minister Jim Chalmers declaring an end to the war against Iran cannot come soon enough for Australia’s fragile economy, with warnings that businesses will hit the wall at record rates without a drop in fuel prices.
Figures released by the Australian Bureau of Statistics on Tuesday showed inflation had stabilized before the war, partly due to declines in petrol and diesel costs. This development may have discouraged the Central Bank ahead of its next interest rate decision.
Annual inflation decreased slightly to 3.7 percent in February; transportation costs alone fell by 0.6 percent during the month. The 3.2 percent decrease in fuel prices was effective in this decrease. The key indicator of closely followed inflation remained stable at 3.3 percent for the third consecutive month.
But that was before Israel and the United States attacked Iran, which nearly closed the Strait of Hormuz and led to 20 percent of the world’s oil supplies passing through it.
Federal Treasury modeling shows that oil at $100 a barrel would soon push inflation toward 5 percent. Inflation at $120 per barrel reaches 5.5 percent and hurts the economy until at least 2027.
Westpac senior economist Justin Smirk said inflation was now likely to rise to 5.5 per cent by mid-year, due almost entirely to the direct impact of higher oil prices.
Describing the Treasury’s modeling as “fairly conservative”, Chalmers said the war was pushing inflation in the wrong direction.
“From a purely economic and market perspective, the end of this war cannot come soon enough,” he said.
“We understand that inflationary pressures from the war in the Middle East are very significant, and we expect to see the consequences of that war pushing inflation up for longer periods of time.”
But shadow treasurer Tim Wilson said inflation data showed non-tradable inflation had risen to 5 per cent due to government actions.
“Australians have lost confidence in Labour’s economic management and the finance chief’s excuses as the active inflation agenda squeezes household budgets and new data confirms consumer confidence has fallen and inflation expectations have skyrocketed,” he said.
Increased inflation is expected to be troublesome for businesses, especially those in the road transport and manufacturing sectors.
Credit data tracking company CreditorWatch said commercial bankruptcy rates have been at record levels since the middle of last year. The rise in inflation will push it further to the limit.
Ivan Colhoun, chief economist at CreditorWatch, said the bankruptcy rate at road transport companies rose to 7.1 percent from 6.2 percent at this time last year.
This was before the rise in oil prices and the Federal Reserve’s latest rate hike.
“As long as energy prices remain high, cash flow pressure will intensify and the likelihood of business failure will increase, especially among smaller operators with limited buffers,” he said.
Inflation data showed that the rate of increase in food prices remained stable at 3.1 percent. But protein is becoming much more expensive, partly due to flooding in Queensland and strong demand from American consumers for Australian beef.
Meat and seafood prices increased by 4.5 percent in the 12 months through February. In Melbourne, beef prices increased by 13.6 percent and 12.8 percent in this period.
Electricity costs have risen 37 percent in the past 12 months, up from the 32.2 percent reported in January. The increase was largely due to the end of federal and state government electricity subsidies. The increase in February was due to the end of the federal government’s subsidy.
There were some positive signs for coffee and tea drinkers; The inflation rate in these basic necessities decreased from 13.5 percent to 11.4 percent. The increase in the cost of takeaway meals also decreased from 3.9 percent to 3.7 percent.
AMP deputy chief economist Diana Mousina said there were signs that inflation pressures were easing, with prices for 49 percent of all goods and services tracked by the Bureau of Statistics rising by less than 2 percent, the highest share in almost a year.
However, despite the risk this posed to the general economy, it was unlikely that the Central Bank would prevent at least one more interest rate increase.
“While we are concerned that moving towards a supply shock could be a problem for the economy down the road, as higher oil prices are likely to reduce GDP growth, we think the RBA will prioritize managing inflation expectations in the near term,” he said.
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Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: X or email.
