Petrol goes up, petrol goes down… should interest rates follow?

According to the mainstream media over the past few weeks, surging petrol prices are a key reason why the Reserve Bank will lift interest rates next week.

“Melbourne Cup rate hike looms as inflation jumps in September quarter,” reported The Australian, driven by “surging petrol prices, rents and power bills”. The galahs at The Australian Financial Review, anxious to see the ordinary Australians they despise so much punished yet again, have demanded another rate rise because of “little prospect of relief from the $2-plus per litre petrol prices”…

Normally oil price rises and falls leave the Reserve Bank unmoved, especially if they lead to particularly volatile price movements, which are then excluded from the Bank’s preferred CPI measure — the trimmed mean, which excludes around 30% of the biggest price rises and falls.

But the commentariat has decided this won’t apply this time around because petrol price rises could mean inflationary expectations become embedded (a persistent and near-mythological fear of central bankers that, like the dreaded wage-price spiral, has little or no evidence behind it) and because the Israel-Hamas war has raised fears of Middle East instability, despite neither side having any role in oil production.

“Since Hamas’ bloody incursion in Israel, global oil prices have risen from their already elevated levels due to ongoing supply cuts by Russia and Saudi Arabia. Brent crude prices have steadily increased to near US$92 a barrel, while West Texas has almost reached US$89 a barrel,” News Corp reported.

Except… oil prices were easing last week: petrol prices in Sydney were at multi-month lows of between $1.72 and $1.85 a litre, after being $2.22 a litre in Sydney in late September and early October. In Melbourne, the last month has seen a consistent fall in prices to below $1.90. Brisbane prices are back to those of mid-October.

As of Tuesday, the final day of October, all those worrisome oil price rises of September and October had been wiped out and October saw big price falls — US and Brent crudes ended at two-month lows on Tuesday as traders fret more about future demand heading into 2024 than any dislocation to crude supplies from Middle East conflict.

If surging petrol prices are a justification for yet another punitive interest rate rise to satisfy the vultures and galahs of the financial markets and business press, why aren’t falling prices a reason to leave them on hold, or even cut them? More to the point, interest rate rises have no effect on non-discretionary demand for fuel. If you have to drive to and from work, or your business relies on road transport, you don’t alter your consumption to reflect higher or lower fuel prices.

Getting wiser about the responsiveness of monetary policy to different price rises is increasingly necessary. The rest of the century is going to see increasing volatility in prices as a shrinking workforce and climate change put upward pressure on production costs, even if we eventually transition to a much more stable supply of energy in the form of renewables. The inflation vulture attitude that sees every price rise as a reason to jack up interest rates will stifle growth and punish households while doing nothing to put downward pressure on prices.