Fuel Shock Set to Push Australian Inflation to 4.7%, Locking In RBA Rate Hike

On Wednesday, the Australian Bureau of Statistics will publish the first inflation figures that capture the economic fallout of the Iran war. The conflict is in its ninth week, and until now its effects on the Australian economy have not shown up in hard data.

Economists at ANZ Bank expect the numbers to show fuel prices jumped 35 per cent in March. That surge would push headline inflation to 4.7 per cent. The figure is a forecast, not yet a published result.

The Reserve Bank, however, is likely to look past the headline number. It was already worried about inflation before the conflict, and it will focus on the quarterly figures released the same day. Its preferred gauge of underlying inflation is the quarterly trimmed mean. ANZ economists Madeline Dunk and Adam Boyton predict it rose 0.9 per cent in the quarter, lifting the annual rate from 3.4 per cent to 3.6 per cent.

They argue the quarterly data should confirm that underlying price pressure was building before the Middle East conflict escalated in late February. In their words, the figures are likely to affirm pressures that were evident in the economy before that escalation.

Fuel is stripped out of the trimmed mean, but it still influences the measure. When fuel's huge jump is trimmed away, other fast-growing spending items move back into the basket, which mechanically lifts core inflation. In February, the Reserve Bank forecast the trimmed mean would reach 3.7 per cent by June.

Electricity adds to the pressure on the headline figure. JP Morgan economists say power prices are set to rise about 20 per cent quarter on quarter as government subsidies roll off. The source also notes that the follow-on effects of the oil shock are due to hit harder in the coming months, so the clear risk is that inflation exceeds the Reserve Bank's forecasts.

ANZ continues to expect the Reserve Bank to lift the cash rate by 25 basis points in May, taking it to 4.35 per cent. Markets are pricing roughly a three-quarter chance of a hike at Tuesday's meeting, with two hikes fully priced in by Christmas.

The article also includes a line noting that one reading, while uncomfortably high for the Reserve Bank, was the lowest since early March, when the government announced it was cutting the fuel excise. The excerpt does not make clear which reading this refers to.

Wednesday's release will show how closely the forecasts match reality, and whether the underlying figure gives the Reserve Bank the case for a May increase.