8 hours ago
Australian motorists and rural residents have been spotted stockpiling petrol in recent days over concerns about fuel shortages. As some pumps do run dry in regional Australia, policymakers cautioned how expectations can become reality.
That's the difficult "problem" facing the Reserve Bank of Australia (RBA) as it tries to stamp out fears of ever rising prices as we suffer through another major supply side shock. "If it becomes one supply shock on top of another – and we've had a few over the last few years – then people start to regard them as normal," AMP economist Shane Oliver told Yahoo Finance.
And that's when the 1970s-style inflation genie can get out of the bottle.
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Since the US started its war in Iran, prices at the bowser have surged more than 55 cents a litre on average across the six capital cities compared to the previous month.
"An average household, given the rise in petrol prices, will be paying an extra $18 a week, pushing towards $80 a month just to keep their car running," Oliver said, adding that he suspects retailers have been "running ahead of things" a bit given the rise in prices at the pump has been more than in global oil markets.
The sharp increase in petrol seen across the country amounts to about a 33 per cent jump. "When you multiply it out with CPI weights, that adds about 1.1 per cent to inflation," Oliver said.
Before the conflict broke out, the RBA was predicting inflation to be around 4.2 per cent in the middle of the year, but the new reality – if the war and disruptions drag on – would push that easily over 5 per cent, he warned.
"I think that's sort of starting to go beyond the RBA's comfort zone."
When Michele Bullock fronted the media following the February rate hike, she said the bank was surprised at how quickly the economy appeared to be operating at capacity – a scenario caused by a lack of productivity growth that was pushing up prices.
Raising interest rates won't lower the price of petrol, but the blunt tool is all the RBA has to cool demand.
"They would be thinking that prior to this happening, we were already at capacity constraints in the economy," Oliver said.
"If we don't knock it on the head quickly, then we'll see increased demands for wage rises. We'll see increased preponderance of higher price rises from businesses just as we've seen from petrol prices, and that will make it even harder to get inflation back down.
