Inflation on track to rise past 5 per cent by June with businesses to go bust in record numbers

Inflation is on track to surge past 5 per cent by June with warnings that businesses will go to the wall at record rates without a fall in fuel prices, as Treasurer Jim Chalmers declares the end to the war against Iran cannot come soon enough for Australia’s fragile economy.

Figures from the Australian Bureau of Statistics released on Tuesday showed inflation was stabilising before the war, partly due to a drop in petrol and diesel costs, in a development that may have given heart to the Reserve Bank ahead of its next interest rates decision.

Annual inflation eased slightly to 3.7 per cent in February, with transport costs alone down 0.6 per cent in the month, led by a 3.2 per cent drop in fuel prices. The closely watched measure of underlying inflation was steady for a third consecutive month at 3.3 per cent.

But that was before Israel and the United States launched their attack on Iran, which has led to the virtual closure of the Strait of Hormuz and the movement through it of 20 per cent of the world’s oil supplies.

Federal Treasury modelling shows that oil at $US100 a barrel over a short period of time will push inflation towards 5 per cent. At $US120 a barrel, inflation reaches 5.5 per cent with the economy scarred until at least 2027.

Westpac senior economist Justin Smirk said inflation at 5.5 per cent by mid-year was now likely, almost all due to the direct impact of high petrol prices.

Chalmers, who described Treasury’s modelling as “pretty conservative”, said the war was driving inflation in the wrong direction.

“Purely from an economic and market point of view, the end of this war can’t come soon enough,” he said.

“We understand that the inflationary pressures from the war in the Middle East are very substantial, and we expect to see the consequences of that war push up inflation higher for longer.”

But shadow treasurer Tim Wilson said the inflation data showed non-tradeable inflation had climbed to 5 per cent due to the government’s actions.

“Australians have lost confidence in Labor’s management of the economy and the treasurer’s excuses as his active inflation agenda squeezes household budgets and new data confirms plummeting consumer confidence and skyrocketing inflation expectations,” he said.

The inflation surge is expected to be painful for businesses, particularly those in the road transport and manufacturing sectors.

Credit data monitoring company CreditorWatch said business insolvency rates had been around record levels since the middle of last year. The lift in inflation would push more over the edge.

CreditorWatch chief economist Ivan Colhoun said the insolvency rate among road freight companies had climbed to 7.1 per cent from 6.2 per cent this time last year.

That was before the jump in oil prices and the Reserve Bank’s most recent interest rate hike.

“As long as energy prices remain elevated, cash flow pressure will intensify and the likelihood of business failures will increase – especially among smaller operators with limited buffers,” he said.

The inflation data showed the rate of growth in food prices was steady at 3.1 per cent. But protein is growing much more expensive, in part due to floods in Queensland and strong demand for Australian beef by American consumers.

Meat and seafood prices were up 4.5 per cent in the 12 months to February. Beef prices in Melbourne jumped by 13.6 per cent over the period, while they lifted by 12.8 per cent in Sydney.

Over the past 12 months, electricity costs soared by 37 per cent, up from the 32.2 per cent reported to January. The increase was driven largely by the end of federal and state government electricity subsidies. The lift in February was due to the end of the federal government’s subsidy.

There were some positive signs for coffee and tea drinkers, with the inflation rate for these essentials easing to a still-high 11.4 per cent from 13.5 per cent. The increase in the cost of takeaway meals also eased to 3.7 per cent from 3.9 per cent.

AMP deputy chief economist Diana Mousina said there were signs inflation pressures were easing, with the prices of 49 per cent of all goods and services tracked by the Bureau of Statistics growing by less than 2 per cent, its highest share in almost a year.

But that was unlikely to prevent at least one more rate increase from the Reserve Bank despite the risk it posed to the broader economy.

“While we are concerned that hiking into a supply shock could be a problem down the track for the economy as higher oil prices are likely to dampen GDP growth, in the near-term we think the RBA will prioritise managing inflation expectations,” she said.

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