RBA assumes rapid fuel-related price increases
Sydney (19 May)
The Reserve Bank of Australia’s (RBA) May inflation forecasts assume that businesses facing elevated fuel costs will raise prices relatively quickly, because of existing capacity constraints, Assistant Governor Sarah Hunter said on 19 May.
“Reports from our liaison program suggest that some firms have responded already, with fuel surcharges raised by firms at the start of supply chains,” Hunter said in a speech at Bloomberg’s Forum for Investment Managers.
“Some construction firms – who have been relatively highly exposed to transport and oil-derived raw materials cost increases – are [also] reviewing prices for new contracts,” Hunter added.
Travel-related products, including flights and accommodation, are the goods most directly impacted by fuel costs, data from the RBA show. Jet fuel accounts for over 9% of the final price of travel-related products, according to the RBA.
Qantas Group’s jet fuel costs more than doubled between late-February and mid-April, largely because of jet refining margins, it said on 14 April. The company expects jet fuel prices to hover between A$185/barrel and A$200/barrel over January-July. It has increased ticket prices since February because of elevated costs.
Groceries, fruits, and vegetables are also exposed to fuel price increases. Petrol and diesel costs account for 3-5% of the final price of those products, according to the RBA.
Iran-war-related price increases and the RBA’s May interest rate hike mean that suppliers cannot continue to fully absorb elevated costs, the Australian Food and Grocery Council (AFGC) said on 8 May.
“Retailers and suppliers cannot continue to swallow these increases without a long-lasting impact on our industry,” AFGC CEO Colm Maguire said. “To protect jobs … and to ensure the sustainability of [the sector], profitable operations are not a luxury, they are a necessity,” Maguire added.
Hunter also warned about the risk of increased inflation expectations in her speech. Inflation could be more severe than expected if high fuel prices cause inflation expectations to rise, she said.
“If expectations rise persistently, it becomes harder for the central bank to bring inflation back to target … Doing so may require a more substantial slowing of economic activity, as we saw during the early 1990s recession,” Hunter added.
Australia experienced a recession in 1991-1992, partly because of high interest rates and recessions in other countries. The country’s unemployment rate rose from 6.1% in January 1990 to 11.2% in December 1992, data from the Australian Bureau of Statistics show. It remained at over 6.1% until June 2000.
By Avinash Govind