Inflation fears mount as northern hemisphere’s energy crisis feeds price rises across the board

Long lines at UK petrol stations and blackouts rolling across China seem far away from our experience here in Australia. We are rich in solar energy and abundant in brown coal; we pump more gas than anyone. But the northern hemisphere’s energy crisis could send shockwaves in our direction, and could even be the harbinger of an enemy long forgotten – inflation.

The price of energy feeds into the global economy in many ways, and when oil, coal and gas prices are all rising at once, that lifts prices in many industries. In coming weeks, petrol prices at the pump are likely to hit new records as oil has risen to over $80 a barrel. According to the fuel price website petrolspy.com.au, Sydney’s average price for unleaded petrol (U91 with 10% ethanol) is $1.74 a litre and the cycle is still rising. Could this be the fuel price cycle where prices pop over $2 a litre?

The price of oil briefly went negative during the early days of the pandemic and it lingered around $25 a barrel for a while. But now amid a surge in demand Brent crude oil is selling for over $80 a barrel, the highest level since 2014 (when OPEC collapsed). That is also pushing up natural gas prices. Spot prices for gas in Japan and Korea have risen nearly four-fold. Keeping warm this northern hemisphere winter is going to be expensive. 

Anything made using energy — be it manufacturing or construction — is likely to get more expensive. Gas also feeds into fertiliser production. So it is no surprise the price of fertiliser has hit its highest point on record, as the next graph shows.

But farmers aren’t sweating this price rise because they are making hay on the other side. The price of what they sell has also gone bananas. The UN’s food and agricultural organisation (FAO) keeps an index of international food prices, shown in the next graph. Price pressure might not be showing up yet in the local shops but it has certainly hit the global markets where food trades as a commodity.

Almost everywhere we look we can find input price pressures. Lumber prices have been ridiculous for well over a year now. Coffee is supposedly going to be in shortage. Beef already costs far more than it did a few years ago. 

Australia is not in nearly so bad a position as some other countries, because we sell a lot of these things. Coal, gas, beef — these are all things that fatten the Australian purse when their prices rise. Farmers win, mining shareholders win, and the federal government wins via tax receipts. But a whopping current account surplus doesn’t keep prices down at the shops. And that’s why we need to keep an eye on inflation. 

Australia slew the inflation dragon a long time ago. Its skin has shrivelled up and its scales blown away on the wind like dust. A generation is rising for whom inflation is a mythical beast, a fairytale. But they might be about to get a taste of its hot breath. 

The RBA is still forecasting low inflation. “In underlying terms, inflation is expected to be 1.75% over 2022 and 2.25% over 2023,” governor Philip Lowe said in August. The RBA continues to have in place policies designed to rev the economy up. Those policies are warranted given the economic destruction of the recent Delta waves. But how fast can the RBA react if inflation proves to be more than transitory?

Australia saw a big fall in inflation in 2020 and a big lift in inflation in 2021 as prices went back to normal. The question is whether we settle back into the low inflation groove. In America, the US Federal Reserve is considering raising interest rates as soon as 2022, to try to prevent inflation from frothing over too much.

The RBA has admitted global events are a major input to its interest rate settings. Is it possible the bank could renege on its plan not to raise rates until 2024? If it does, it won’t be politically neutral. Higher petrol prices and higher interest rates could create a very displeased Australian population.