ECONOMY

Why petrol prices will hurt beyond the bowser

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“Australia does not import large amounts, but taking this action with key partners will collectively curtail Russia’s revenue and ability to finance Russian President Vladimir Putin’s unjustified war against Ukraine,” she said.

Mr James said it was unclear when petrol prices would stabilize or fall due to uncertainty around Russia’s military plans.

“The situation in Ukraine can easily go both ways: it can escalate, and of course then we’re facing significant problems, or they can find a solution,” he said.

Mr James said the higher cost of transporting fresh food including fruit, vegetables, meat and seafood around the country could be absorbed by wholesalers or retailers but was likely to be passed on at least in part to consumers.

“In the current environment, given the range of upward pressures on costs, most businesses are wanting to pass that through to consumers; at least in part,” he said.

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ANZ senior economist Catherine Birch believes inflation could nudge 5 per cent in coming months. That would be the highest level since the introduction of the GST in 2000 that for a short time pushed up consumer prices. At least then, Australians were compensated with substantial tax cuts.

But Mr James said households were in a good position to cope if prices rose, with people ahead on their mortgages and high savings levels.

Households saved almost $250 billion in cash through the coronavirus recession, with generous government stimulus on offer and the closure of large parts of the economy narrowing Australians’ spending options. Australians were locked in the country, unable to convert their money to US dollars, British pounds, euros or Japanese yen.

While the extra savings will give people a buffer, it also means they will be able to afford any price rises by retailers. As independent economist Stephen Koukoulas noted this week, that means inflation could easily become entrenched rather than being a passing fancy as suggested by the RBA.

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Mr Koukoulas believes inflation could exceed 6.5 per cent in the June and September quarters. Australians have not seen that sort of price pressure since 1990 as the country plunged into recession.

He said this once-in-a-generation level of inflation would have major effects on the economy.

“It has the potential to distort the way the economy functions. It will have a negative impact on household budgets – even if wages growth picks up in response to the low unemployment rate,” he said.

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