Jim Chalmers warns of inflation rise ahead of interest rate hike, ongoing global fuel crisis

A widely-tipped interest rate hike on top of the ongoing global fuel crisis is spelling doom and gloom for household budgets as Jim Chalmers warns Treasury thinks inflation could rise close to 5 per cent.

Prices have soared at bowsers across the country and many regional areas have reported fuel shortages in the fortnight since the US-Israel-Iran war began.

In Perth on Monday, the average price of unleaded will increase only slightly to 229.3 cents per litre.

But the increase is bigger in Port Hedland, up to 247.2.

According to FuelWatch, some outlets in WA will be charging up to 259.9 for ULP while the average for diesel will reach 266.3.

There are fears this could flow on to higher food prices — yet another hit to household budgets — as the cost of fuel affects the trucking industry.

The Treasurer cautioned the impact from soaring prices depended greatly on how long the war lasted.

As things stand now, it could push inflation up from the current 3.8 per cent to “mid-to-high fours”.

This would add further pain to Australians still struggling with the cost of living, especially if the Reserve Bank hikes interest rates on Tuesday as widely expected.

The big four banks have all tipped rate hikes this week and in May, and market expectations are that a rise on Tuesday is two-thirds likely.

Dr Chalmers said Treasury was constantly revising its forecasts as it prepares the May Budget against the uncertainty of the war in the Middle East.

“If we were putting pencils down on those forecasts today, we’d have inflation peaking somewhere between the mid to high fours,” he said.

“We don’t have a model that has petrol prices going that high (to $3 a litre), but there’s a lot of volatility and a lot of unpredictability in the global oil market, and of course, when it comes to petrol at the bowser here in Australia as well.”

Inflation was running at 3.8 per cent in the year to January, above the Reserve Bank’s target band of 2-3 per cent.

Average petrol prices in capital cities last week were 47 cents higher than in February.

If that level was sustained, AMP chief economist Shane Oliver said March’s inflation data could jump closer to 5 per cent.

“It’s a difficult balancing act, I think, for the bank,” he told The West.

“We know that higher petrol prices will add to inflation directly, then you’ve got indirect effects, fertiliser and transport costs and so on.

“But it’s also going to be a drag on household income... You’d be getting close to an extra $20 a week in fuel bills, which is $100 or just over a month — in other words, one rate hike. So that’s less money for people to spend in the wider community, which could put downwards pressure on inflation.”

KPMG’s Brendan Rynne said the biggest risk around oil prices and inflation was the war’s duration – and no one knew that answer to that, given the Trump administration’s mixed signals.

A price shock that lasted a few weeks would flow through the system, but sustained hikes for a quarter or more risked re-setting people’s inflation expectations and that was a bigger concern for the RBA, he said.

Neither economist thought the RBA should lift rates this week, saying it would be better to wait until the May meeting to have a handle on how the war is playing out.

Dr Oliver pointed to the immense political pressure on Donald Trump to end the conflict quickly.

The US President overnight called for other countries to help shepherd oil tankers through the Strait of Hormuz, which Iran has effectively blocked.

About a fifth of the world’s oil supply is shipped through the strait in normal times.

“The Countries of the World that receive Oil through the Hormuz Strait must take care of that passage,” Mr Trump wrote on Truth Social.

“Hopefully China, France, Japan, South Korea, the UK, and others, that are affected by this artificial constraint, will send Ships to the area so that the Hormuz Strait will no longer be a threat by a Nation that has been totally decapitated.”

Shadow defence minister James Paterson noted there hadn’t been a public formal request for Australia to send naval support to the region.

Any such request “would need to be assessed against our national interest and the availability of naval assets”, he said.

Energy Minister Chris Bowen has taken two steps to increase the supply of petrol across Australia — allowing dirtier fuel to be sold domestically instead of exported and releasing million of litres from reserves — while also insisting the continued arrival of ships with new supplies means shortages locally are being created by stronger demand not supply problems.

But he’s stopped short of providing guarantees that Australia won’t run out of fuel.

However, Dr Chalmers said the Government wasn’t expecting that scenario.

“We’ve got big stockpiles of fuel, whether it’s petrol or diesel or jet fuel, and we work around the clock to make sure that Australia doesn’t run out. We’re certainly not expecting that we will,” he told Sky News.

One Nation MP Barnaby Joyce called for petrol rationing and a return to the even and odd number plate system used during fuel shocks in the past.

“People are going to get angry about that, no doubt. But it’s better that they’re angry and say you’ve got a plan, then what exactly has happened here,” he told the ABC’s Insiders.

“We have to have a plan so that those semi-trailers … can get to the supermarkets because they have your spuds and your eggs and your milk and all the things you want to eat in them, and we’ve got to keep them moving.”

The Government isn’t considering cutting the 52.6 cents per litre excise on petrol and diesel.

“Obviously, at some point down the track, governments might choose to make different decisions about this, but it’s not something that’s on the list of things that we are working up for the budget,” Dr Chalmers said.

New Nationals leader Matt Canavan said cutting the fuel excise wasn’t the right way to provide relief to household because it had complicated knock-on effects for the trucking industry.