Australia’s CPI Stays High Globally Even After Interest Rate Hike

In a significant move, the Reserve Bank of Australia (RBA) addressed the economic instability caused by the ongoing conflict in the Middle East by raising the cash rate this Tuesday. The central bank highlighted the “substantial risks” this situation poses to both the economy and inflation.

Economists have raised concerns that Australia’s consumer price index (CPI), which tracks the rise in prices of household goods and services, might remain above the RBA’s target for an extended period. This follows the bank’s decision at its recent meeting in March, where the board narrowly voted to increase the official cash rate from 3.85% to 4.1%. This decision was largely anticipated by banks and financial analysts.

The central bank’s latest monetary policy statement warned of “sharply higher fuel prices” resulting from the conflict, though inflation was already deemed excessively high prior to these events. As of January, Australia’s CPI stood at 3.8%, one of the highest rates globally, indicating persistent inflationary pressures.

The conflict’s impact has been particularly felt in the energy sector. Since the military actions by the United States and Israel against Iran nearly three weeks ago, petrol prices across Australia have surged by approximately 50 cents per litre, according to the Australian Competition and Consumer Commission (ACCC). This price hike has prompted the consumer watchdog to call upon major fuel suppliers to justify these sudden increases, amid growing concerns over affordability and supply chain disruptions.

Since the United States and Israel attacked Iran almost three weeks ago, petrol prices have risen by around 50 cents per litre on average around the country, according to Australian Competition and Consumer Commission (ACCC) data, leading to the consumer watchdog summoning major fuel suppliers to explain the price increases.

In its latest report, the Organisation for Economic Co-operation and Development (OECD) reported an average CPI of 3.3 per cent in January.

While the OECD average CPI has been dropping, Australia’s has been on the rise, which could put the country at somewhat of an economic disadvantage to comparable global economies.

Economists have told SBS News that Australia’s response to conflicts in the Middle East and Europe plays a part in heightened inflation, warning CPI could increase to almost 5 per cent in the weeks ahead.

What pressures are affecting Australia?

Trent Saunders, a senior economist with CBA, told SBS News that Australia’s economy is healthy overall and has an “incredibly low” unemployment rate.

But there are also headwinds contributing to higher inflation.

“With GDP growth now starting to pick up, what we’re seeing is that we’re starting to hit up against these capacity constraints,” he said.

“And this has started to flow through to higher inflation.”

Other economies, like those of wealthy European nations, have less growth than Australia and lower CPIs.

“They’re not facing the same kind of inflationary pressures that we’ve seen in Australia.”

How does Australia compare to the world?

Australia is tied fifth in the world for the highest CPI, looking at the most recent data from the OECD and the Australian Bureau of Statistics (ABS) from January.

The highest was Türkiye at a staggering 30.7 per cent, followed by Colombia and Iceland on 5.4 per cent and 5.2 per cent, respectively.

Professor and economist Warwick McKibbin from the Australian National University explained why Türkiye has such high inflation.

“Their monetary policy is too loose. And as you push more money into the economy, people will spend that money on goods and services, and that drives up their price,” he said.

He said that other countries, including Brazil and Argentina, have had similar issues with inflation.

“If the central bank is not independent, then governments that need money finance it through an inflation tax rather than through regular taxes because they do not have enough revenue,” he said.

While Australia’s CPI is far lower than Türkiye’s, it outstrips comparable economies in the UK, US, France, Germany and Canada.

McKibbin said that Australia’s CPI was higher because the RBA didn’t raise rates as much as other central banks after the COVID-19 pandemic and Russia’s full-scale invasion of Ukraine.

“So those other central banks were a lot more aggressive. They raise interest rates, which is equivalent to reducing the amount of money in the economy, and that slows down demand,” he said.

While the higher CPI isn’t “of much concern”, McKibbin added, it can place Australia at an economic disadvantage globally.

“If you’ve got a higher inflation rate than the rest of the world, then generally the exchange rate would appreciate relative to the rest of the world. And that in itself also adds to the inflation problem because it makes imports more expensive.”

Impacts of the conflict

The Reserve Bank board acknowledged in its decision that the conflict in the Middle East could continue to push up inflation.

“A longer or more severe conflict could put further upward pressure on global energy prices; this will push up near-term inflation and could also increase inflation further out if it impairs supply capacity or price rises get built into longer-term inflation expectations,” it wrote.

Saunders expected the next inflation data to show a “quite large” increase to CPI, which could increase to over 4 per cent, driven by fuel prices.

McKibbin estimated that CPI could climb to as much as 4.8 per cent amid “highly uncertain” fuel supplies.

“If oil can start getting through other places like China or India that could ease pressures, but it’s highly uncertain. We’re seeing estimates inflation could increase by between 0.5 to 1 per cent otherwise.”

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