CBA has a nice little study out into the role of the dollar and petrol prices in household spending that adds to my own recent analysis.
The automotive fuel component of the CPI fell by 3.1% in QII. This is because petrol prices fell in April and May and then rose over June. But overall, petrol prices were lower in QII than in QI. Since then, the combination of rising oil prices and a weaker AUD has seen nominal petrol prices at their highest level since 2008.
In real terms, however, they have not yet hit their 2008 highs.
Impact of higher petrol prices on CPI Retail petrol prices have a weight of 3½% per cent in the headline CPI. Swings in petrol prices can have a significant impact on headline inflation. Changes in the price of retail petrol prices are essentially driven by two things: (i) the global price of crude oil; and (ii) the exchange rate. We can combine factors (i) and (ii) by measuring the global price of crude oil in Australian dollars.
On this basis, the price of crude oil in AUD equivalent has risen by around 30% since mid- April (when the AUD peaked against the USD). This compares with a rise of around 12% in the price of crude oil in USD terms. Over that same period, the price of petrol rose by a small amount. But the price will continue to trend higher over the coming weeks because of the lag between changes in the spot price of crude oil and prices at the pump.
The total percentage change in the retail petrol price, however, should always be smaller than the percentage change in the exchange rate adjusted crude oil price. This is because excise taxes are levied on the volume sold rather than on the price sold (the excise rate is currently 38 cents per litre). All up, taxes are currently around 40% of the bowser price. Other costs associated with the sale of petrol (e.g. wages, storage, transportation) are non-trivial and are fairly stable over time.
If the retail petrol price averages around its current level ($1.54 a litre) then it will be up 7% over QIII which would contribute 0.25ppts to QIII headline CPI.
Impact on Consumer Spending Economy
Petrol expenditure is one of the biggest regular expenses for households. On our estimates, the current “critical price” price at which the price of petrol impacts other household spending decisions is $1.44 per litre (consumer demand for petrol is relatively inelastic up until this price). With the current retail petrol price above that “critical price”, there will be some impact on household expenditure decisions. Either the car will be driven less or there will be small changes to other expenditure decisions, particularly discretionary purchases, like eating out or entertainment. The rise in retail petrol prices, however, has been softened to some extent by fuel docket discounts issued by the big supermarket chains.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
