22 February 2024
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The human tragedy of Gaza and Israel brings economic pain

Peter Switzer
23 October 2023

Along with the weaker local dollar, the Qantas announcement that it will be raising airfares on account of the oil price spike because of the Israel-Hamas war, puts more pressure on the hip pockets of those Australians already under cost-of-living strain. But wait, there’s more potential pain coming that we might see on Wednesday when the latest inflation number is released. This is the September quarter Consumer Price Index (CPI). If it’s a bad result, the odds will shorten for a Cup Day rate rise. However, if the Reserve Bank did that, it could increase the chances of a recession in Australia next year, when the full impact of 13 interest rate rises would start to really slow down the economy.

Late last week, the AFR reported that Qantas would increase average airfares by 3.5%, while Jetstar flights would be 3% dearer because the Middle East war is set to drive the oil price to US$100 a barrel. Oil prices had been on the move higher for some time and in late September, the airline said it would absorb the then 30% increase in the rise in the price of jet fuel. The latest spike (because of Gaza) has meant Qantas now needs to increase airfares.

However, this oil price hit isn’t just a traveller impost. As we all know, the cost of petrol has been on the rise and some of this is bound to show up in the inflation figures we see on Wednesday.

This is how CommSec’s chief economist Craig James assesses the situation: “The Aussie consumer price index (CPI) data on Wednesday will likely be dominated by a 7% lift in petrol prices. The headline rate of inflation is tipped to rise 0.9% in the September quarter to be up 5.1% on the year. The underlying rate (trimmed mean) is tipped to grow 1% in the quarter and 4.9% for the year.”

Any numbers below these forecasts would be great for interest rate worriers as it would keep the RBA on hold with its rate rises, but if the numbers come in worse than expected, then Melbourne Cup Day on Tuesday fortnight could be less enjoyable. The RBA board will make its announcement on rates 30 minutes before the commentator says: “Go their racing!” at 3pm.

In a perfect world (which economics isn’t), inflation would come in at a lower-than-expected reading and the RBA would remain ‘on hold’. But if economists are right and inflation is higher than expected, then one misery factor i.e., higher airfares will pile-in on top of another misery factor i.e., higher petrol prices, to add to our misery with higher interest rates.

Eventually, all this misery leads to less spending and a significant economic slowdown in 2024. That’s why the new RBA Governor Michele Bullock would prefer to remain on hold with rates, but if oil-fuelled inflation is too high, she’ll have to show she’s the boss and has the guts to raise rates.

Until the Israel-Gaza development, I was pretty convinced that rate rises had topped out. But with oil prices spiking and adding to inflation, I’m less confident about rates holding. Why didn’t I see that Hamas would decide to bomb Israel? Clearly, I’m saying the economy is hard enough to guess under normal circumstances, but throw in an unexpected war, the degree of difficulty of forecasting goes through the roof.

All that said, there’s one plus out there that could restrain the RBA on Cup Day. Right now, US experts are tipping no rate rise from the Federal Reserve in November, and a December rise is seen as a low chance.

As an economist, one thing Michele Bullock knows is that rising petrol prices are actually like an interest rate rise that affects more Australians. More Aussies buy petrol than have a mortgage so a hike in the petrol price effectively helps slow down spending and demand-created inflation. It could take guts for Ms Bullock to raise rates on Cup Day, but it will also take guts not to. She might think 12 rate rises, inflation at 5% and petrol prices near $2 a litre (for unleaded fuel), is enough to scare the pants off big spending Aussies.

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