00:01already to the economy it's clearly resulted in renewed cost of living pressures as a result of
00:09the increase in the price not just of petrol and diesel but of a growing range of things for which
00:16petrol and diesel are an input including fertilizers and plastics that's showing up in
00:23increased financial pressure on agriculture transport construction and a range of other
00:30industries and ultimately these higher prices are going to end up being paid for by some combination
00:37of consumers and governments my calculation is that the impact on aggregate household income
00:45of the increase in fuel prices net of the excise cut which the prime minister and treasurer announced
00:52earlier this week is equivalent to a 45 basis point increase in interest rates obviously affecting
01:00households differently from an increase in interest rates of that magnitude would because roughly
01:07speaking a third of australian households have mortgages and a quarter of them have big mortgages
01:12so they're the ones who bear the brunt of increases in interest rates whereas the proportion of the
01:18population who are impacted by higher fuel prices is much broader than that but you know if this
01:25continues even if the military hostilities in the persian gulf end according to the timetable that
01:31president trump was signaling earlier today it's widely expected that there will be tail consequences
01:38as a result of the damage that's been done to oil and gas production facilities in the persian gulf
01:44and so it would seem by the possibility that the strait of humus will remain blocked by iran and that
01:51president trump doesn't particularly care what the implications of that are for the u.s as traditional
01:57allies in europe and asia as well as for other countries so you know these higher prices could continue for
02:03some time and that is in turn going to probably result in some slowing in the australian economy as well
02:10and the fact that you've got on the one hand higher inflation and on the other potentially weaker
02:16economic growth and lower unemployment complicates the task of deciding for policymakers the government
02:22and the reserve bank how best to respond to that should they put interest rates up or not
02:26should at some point in the future they actually contemplate reducing them well that's the dilemma
02:32isn't it rising inflation with lower growth what do you do well that's right that's what we used to
02:38call stagflation in the aftermath of the oil shocks of the mid-1970s which in some ways have a lot
02:45of
02:45parallels with today they're a better parallel than the surge in energy prices that followed putin's
02:52invasion of ukraine four years ago because that was really just about fuel and fertilizers and gas
02:58becoming more expensive this is not only about them becoming more expensive but potentially about them
03:04becoming less readily available to people who really need them so there's an additional complication
03:09that the government is working on and they are working on it to do what they can to ensure that
03:15supplies of essential fuels and products are available to those who desperately need them without
03:22if it can be avoided unduly disrupting everybody else's lives in the process are we talking about
03:27recession here so i don't believe we are at the moment um and especially if the reserve bank judges
03:34that it doesn't need to raise interest rates anymore which they may well judge because as i said before the
03:40impact on households of these higher fuel prices is actually in some ways very similar to the impact of
03:46additional increases uh of further increases in interest rates what we're going to be watching very closely
03:52is the extent to which higher fuel prices feed through into a broad range of prices of other
03:58goods and services as they are starting to do but also importantly whether this period of higher fuel
04:05prices prompts people and businesses to start believing that higher inflation will be a permanent
04:12feature of life because one of the lessons of the experience of the oil shocks of 50 years ago is
04:17that
04:18if people and businesses come to expect that inflation will remain high they're likely to do things that
04:23make it more likely that inflation will remain high such as putting prices up to claw back not just cost
04:29increases that have occurred but cost increases they think are going to occur or in the case of workers
04:35seeking wage increases to compensate them
Comments