Inflation in Australia has surged to 4.6% in the year to March, up from 3.7% the previous month, as the impact of the Iran war begins to affect fuel prices. Treasurer Jim Chalmers warned this marks the start of a fuel shock that will ripple through the economy in coming months.
Financial markets now predict an 68% chance that the Reserve Bank of Australia (RBA) will raise interest rates for a third consecutive meeting next Tuesday, down from 80% before the data release. The RBA faces a difficult decision as it tries to contain inflation while economic growth is expected to slow sharply.
Fuel costs jumped 33% in March, though this was before a 26 cent cut to petrol excise. Underlying inflation, excluding volatile items, held steady at 3.3%, suggesting price pressures eased in some areas. However, economist Josh Williamson of Citi warned inflation could push towards 5.5% by mid-year as fuel costs flow through to construction and food services.
Rents rose 3.7% over the year, outpacing wage growth, while homebuilding costs increased 4.5% and are expected to accelerate. Electricity prices dropped in March but were 25% higher than a year earlier when government rebates were in place. The government has halved fuel excise for three months and introduced a GST rebate on petrol and diesel to cushion the blow.
Economists caution that further untargeted cost-of-living support could complicate the RBA's fight against inflation. Luke Yeaman of Commonwealth Bank expects some additional household support in the 12 May budget but warns against a big splash that could add to inflationary pressures.
