Wow. Just when the inflation genie was starting to slip back into the bottle, boom. The petrol price has decided to set new altitude records.
I filled up the car a few days ago and it was like an out-of-body experience. The speed with which the price on the bowser rose was astronomical. It felt like I was watching a video on fast-forward. As the next chart shows, both diesel and petrol prices are spiking heavily, reaching levels they’ve touched only very briefly in the past. Diesel prices are lifting the most.
This is most unexpected, and the reason is a combination of factors. The global oil price is up, as the next chart shows, and the Australian dollar is down. That combination makes fuel, which we import, extra pricey.
Fuel prices are probably the most salient price in the economy. Even though fuel is not the biggest expense households have, it’s the one price people are most aware of — and most prone to get upset about.
The next chart shows why. Fuel sales are extremely stable. It’s quite remarkable. Prices soar and fall, gyrate and cycle. But we just say: “Fill ‘er up.”
Fuel is what we call price-inelastic. Some people can work from home, cycle to their destinations, move house, or sell their car to buy an EV. But at a population level, those moves don’t work. Too few people have sufficient flexibility in their lives for petrol price changes to affect demand in the short run.
There was a dip during lockdowns, but even that wasn’t a fraction of the variation you might see in another category of goods. Demand then sprang back to its previous trajectory.
This is why petrol prices hurt. We have no substitutes. There’s no home brand option you can buy if the price of your preferred option goes up. You just have to suffer.
And rising petrol prices are far from the only kind of suffering in the economy. While inflation is falling from its highs, it’s still positive, and that means prices are still rising. What’s more, they are rising from their new, uncomfortably high levels. Inflation of 5% rather than 8% is welcome, but when the base price of the item is $1.20 instead of the old $1, any rise is extremely unwelcome.
As well as the poison of inflation, households are suffering from the cure. Higher rates continue to crimp household budgets. Retail spending fell in June, the first fall in six months.
Although the RBA is unlikely to raise rates again, the Commonwealth Bank reminds us that the impact of rate rises on households happens with a lag. Billions of dollars worth of fixed-rate loans are going to expire in the next six months.
“A$34 billion expired over the six months to June 2023 with a further A$52 billion expiring in the six months to December 2023,” wrote CBA economist Stephen Wu in a note to clients this week. “Only two‑thirds of the current cash rate increase has been felt by borrowers.”
The economy will continue to slow as Christmas approaches. That is likely to sour the national mood, and if petrol prices stay high the government’s popularity could suffer. Don’t expect Prime Minister Anthony Albanese to get on the front foot over the Voice if all anyone is talking about is the cost of living.
Over the longer run, of course, higher oil prices will cause us to change how we live our lives, with more efficient vehicles and more EVs on the road. But for now, the main side effect is probably economic friction and political unhappiness.
Are you driving less and planning to spend less on Christmas presents? Let us know by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.
