Why an attack on a ship in the Strait of Hormuz is a bad sign for Australia’s inflation fight

An attack on a ship transiting the Strait of Hormuz is a sign Australia’s inflation crisis could be prolonged and see the Reserve Bank increase interest rates again in August to combat a wage-price spiral.

While crude oil prices have fallen back to $US70 a barrel for the first time since the start of March, during the early days of the Iran war, secondary effects from the global oil crisis are yet to be felt.

Iran’s new Persian Gulf Strait Authority — established during the conflict to manage ships transiting through the Strait of Hormuz — is refusing to guarantee safe passage of vessels.

“Any consequences arising from the use of unauthorised routes shall be the responsibility of the vessel’s owner, operator and master,” it said on X.

A Singapore-flagged cargo ship, identified by Reuters as Ever Lonely, was targeted by a drone, which could potentially delay supplies of crude oil to Asian refineries that supply Australia with 80 per cent of its petrol and diesel.

The UN’s International Maritime Organisation has since delayed the planned evacuation of more than 11,000 sailors stranded in the Strait of Hormuz following the attack.

“While it remains unclear whether this was a deliberate action by Iran, the incident is likely to severely impact confidence that ships can transit safely through the strait,” Westpac senior economist Mantas Vanagas said.

Treasurer Jim Chalmers said unfolding events in the Middle East justified fuel tax relief being extended beyond June 30 until August 2, but at reduced rate of 16 cents a litre instead of 32 cents a litre.

“It’s played a really important role in taking some of the sting out of this war in the Middle East, and the best way to extend that is in a tapered way so that it tapers off at the beginning of August,” he told reporters on Friday.

“There’s still a lot of uncertainty in the Middle East, even with welcome developments in the last couple of weeks.”

Higher prices for petrol, plastics and fertiliser as a result of further disruptions in the Persian Gulf could delay underlying inflation returning to the mid-point of the Reserve Bank of Australia’s 2-3 per cent, KPMG chief economist Brendan Rynne said.

“What we’re now going to start to see is the second-round effects associated with the initial price rises,” he told The Nightly.

“It’s basically a prolonging of the oil price effects and that prolonging is much more concerning from a core inflation perspective.

“What it does is it pushes those inflationary expectations higher and it’s those inflationary expectations that get metered into wage negotiations and then bakes into a small wage-price spiral.”

Underlying, trimmed mean inflation rose to a two-year high of 3.6 per cent in May, up from April’s annual pace of 3.4 per cent, and Dr Rynne is expecting the Reserve Bank to raise interest rates again in August, with more pain to potentially follow.

While KPMG is expecting the RBA’s preferred measure of underlying inflation to get to the top of the target band by year’s end, it could take another year for it to get to the mid-point of that band.

“The problem with trimmed mean is it’s not going to come down quickly,” Dr Rynne said.

“So it’s not good enough for it to just get into the top of the band — the RBA from a credibility perspective is now saying they want it at 2.5 per cent.

“Because of all of that, we’re anticipating at least one more cash rate increase, most likely in August, but beyond that, our own modelling says that gets us into the top half of the two to three per cent band but not two-and-a-half.”

Another hike on August 11 would take the RBA cash rate to a 15-year high of 4.6 per cent and further turmoil in the Gulf could see rate hiked even higher to an 18-year high of 4.85 per cent.