Inflation soars to near three-year high off back of petrol prices, making rate rise more likely

Inflation surged to a near three-year high of 4.6 per cent in March - making an interest rate rise more likely next week - as the first full month of the Iran war pushed average petrol prices up by a third to new record high levels.

Automotive fuel prices soared by 24.2 per cent over the year - and by 32.8 per cent in March alone - as unleaded prices soared above $2.50 a litre and diesel surpassed $3 a litre, before the Federal Government this month temporarily halved fuel excise to 26.3 cents a litre for three months.

The worst consumer price index reading since September 2023 was even more dire than Westpac’s prediction of a 4.2 per cent headline inflation pace after crude oil prices last month hit record-high levels above $US100 a barrel.

With crude oil prices now at $US111 a barrel, Treasurer Jim Chalmers is expecting motorists to pay more, following recent falls in price from fuel tax cuts.

“That will obviously impact prices at the bowser going forward,” he told reporters in Brisbane on Wednesday.

The bad news on inflation increases the chance of the Reserve Bank of Australia raising interest rates again on May 5, and marked a huge jump from February’s annual headline inflation pace of 3.7 per cent before the US airstrikes on Tehran.

“We already had an inflation challenge in our economy, we know that, before the conflict, but 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, ” Dr Chalmers said.

“Treasury’s expectation is that inflation is likely to peak higher than this but they are still finalising their forecasts ahead of the Budget next month.

“We know the Australian economy is not immune from all of this global uncertainty and volatility and unpredictable conditions, but we are better placed and better prepared and with faster growth than any major, advanced economy.”

Next week, home borrowers would be copping the third consecutive RBA meeting increase for the first time since March 2023, with inflation now even further above the RBA’s 2-3 per cent target.

“Today’s CPI print, the first to partially reflect the Strait of Hormuz closure, points to a rate hike from the Reserve Bank of Australia next week,” Deloitte Access Economics partner Stephen Smith said.

“That rate hike is not guaranteed, but Australia’s starting point for inflation heading into this crisis likely leaves the central bank with little choice.”

The blockade in the Strait of Hormuz saw transport costs climb by 8.9 per cent over the year, which was even higher than the goods inflation increase of 5.5 per cent, the Australian Bureau of Statistics data released on Wednesday showed.

“Most businesses are unable to pass on these costs, with 64 per cent reporting that they are absorbing the higher costs,” Australian Chamber of Commerce and Industry chief executive Andrew McKellar said, citing a survey of its members.

Clothing and footwear costs went up by 7 per cent.

Higher prices for diesel, needed to harvest and transport crops, are yet to be felt at the supermarket.

Fruit and vegetable prices rose by a more moderate 1.8 per cent over the year but fruit prices did soar by 4.3 per cent as a result of higher prices for strawberries, blueberries and apples.

Meat and seafood prices rose by 4.8 per cent but bread and cereal prices rose by just 0.6 per cent, with the data yet to reflect weaker wheat harvests expected later in the year flowing from higher diesel prices.

Services inflation is now less of a problem, growing by 3.6 per cent on an annual basis but education costs rose by 4.8 per cent.

Housing costs, covering rents and mortgage repayments, surged by 6.5 per cent and more rate rises would add to an already financially tight set of circumstances.

Without volatile items, underlying inflation grew by 3.3 per cent over the year, which was still above the Reserve Bank’s target band.

While the inflation jump in March was less severe than early 2022, after Russia’s invasion of Ukraine sparked sanctions, the one-third increase in automotive fuel prices was the most severe in monthly ABS records going back to 2017.