Westpac expecting inflation will reach new three-year high in March during first month of Iran war
Westpac has updated its forecast to have inflation in March — during the first full month of the Iran war - reaching a new three-year high.
The first full month of the US-led war on Iran is expected to see inflation soar to a three-year high and it’s tipped to get worse even with a cut in fuel tax.
Skyrocketing crude oil costs have also seen diesel prices at the bowser rise or remain the same in four of Australia’s capital city markets this week, despite a temporary excise halving, new Federal Government data released late on Friday afternoon revealed.
The Westpac bank updated its forecasts on Friday afternoon to have the consumer price index hitting 4.2 per cent in March, the first full month of the Middle East conflict.
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By continuing you agree to our Terms and Privacy Policy.This would be the highest headline inflation rate since September 2023, during the Reserve Bank of Australia’s last hiking cycle in the wake of Russia’s Ukraine invasion.
Before the Iran conflict, Australia’s inflation rate of 3.7 per cent in February was already well above the RBA’s 2-3 per cent target.
Fuel excise was halved to 26.3 cents a litre on April 1, a day before a GST deal with the states increased overall relief for motorists to 32 cents a litre.
Despite that, Westpac is still expecting the worst global oil shock since the 1970s to see inflation climb to 5.8 per cent by May, reaching a new three-year high as crude oil prices averaged $US120 a barrel in the June quarter, up significantly from Friday’s level of $US96 a barrel.
“A prolonged disruption in the Gulf is sustaining higher energy prices,” senior economist Justin Smirk said.
“This is based on our assessment of unfolding infrastructure damage and a slow recovery in shipping traffic through the Strait of Hormuz.”
The flow-on effects of higher fuel prices, to other parts of the economy, were also expected to see underlying inflation, without volatile price items, hit 4 per cent by mid-year, up from 3.3 per cent in February.
“We were expecting the pace of core inflation to moderate from here but with the conflict in Iran disrupting shipping out of the Gulf, and the resulting surge in fuel prices, we now see fuel prices remaining higher for longer resulting in a greater degree of pass‑through to core inflation,” Mr Smirk said.
By June, headline inflation was expected to ease back to 5.4 per cent from May’s peak.
Fuel prices were expected to increase again in July following the expiry of temporary, three-month halving of fuel tax.
The tax relief has so far failed to translate into cheaper diesel prices with new Australian Competition and Consumer Commission data, released late on Friday afternoon, showing average retail diesel prices were more expensive on April 8 than they were on March 31, the day before the fuel excise cut, in Perth, Canberra, Hobart and Darwin.
“Some fuel companies told the ACCC that they passed on the excise cut immediately (on April 1), while others noted taking longer as they account for existing inventory levels, available supply and local competition dynamics,” the ACCC’s weekly fuel report said.
In Perth, average diesel prices were 318.7 cents a litre on Wednesday, compared with 318.5 cents a litre on the last day of March.
Canberra saw an even bigger increase, with diesel prices rising to 322.3 cents a litre, up from 320.9 cents a litre despite the fuel tax cut.
Hobart diesel prices were the same at 317.5 cents a litre while in Darwin they increased marginally to 322.3 cents a litre from 322.1 cents a litre.
In a sign of more bad news for drivers of utes, four-wheel drives and trucks, wholesale diesel prices have soared by 6.5 per cent during the past week rising from $3.01 a litre in Melbourne on Monday to $3.20 a litre on Friday, Australian Institute of Petroleum data showed.
This figure includes taxes but not the retail margin, which means the diesel being delivered from the terminal gate depot will cost a lot more when it reaches the service station.
NAB noted Australia had the developed world’s highest reliance on diesel.
“Diesel is especially critical: Australia uses more diesel per person than any country with a population above 500,000, reflecting use in road freight, mining and agriculture,” it said.
Average unleaded retail prices, however, have fallen in all eight capital cities since the excise relief, with petrol typically selling for less than $2.30 litre, the ACCC report said.
Westpac is expecting the RBA to hike rates in May, June and August, which would take the cash rate to an 18-year high of 4.85 per cent.
