[Commsec Research] Petrol at a 30-month high, but inflation under control

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Petrol at a 30-month high, but inflation under control

Weekly Petrol; TD inflation gauge, Job Ads

¾ According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 0.6 cents per litre to 143.6 cents a litre in the week to April 3 – a near 30 month high.

¾ Global oil prices have tracked sharply higher over the past week however the recent strength of the Australian dollar should ensure that motorists see pump prices remain steady over the coming fortnight.

¾ The TD Securities-Melbourne Institute monthly inflation gauge rose by 0.6 per cent in March. Excluding volatile items, prices were up just 0.2 per cent – the eight straight month of negligible growth.

¾ Job market is likely to tighten at a modest pace in coming months. The ANZ job ads index rose by a 1.3 per cent in March after a 1.2 per cent rise in the prior month.

What does it all mean?

· After easing modestly pump prices have once again resumed their upward trajectory. Petrol prices are now holding near 30-month highs and unfortunately for motorists it is unlikely to get any better in the near term.

· The political instability in the Middle East and North Africa has ensured that supply threats to oil remain in play and as a result the Singapore unleaded price surged by almost US$2.50 a barrel in the past week. The one saving grace for motorists has been the strength of the Australian dollar, which broke through US104 cents this morning. As such it is looking likely that the Aussie dollar will absorb almost the entire increase in global oil prices – effectively ensuring that pump prices remain around current levels.

· Interestingly it seems that the breakdown of the weekly petrol discount cycle – which was a feature of the Adelaide landscape over the past fortnight – has come to an end. Clearly it was an unsustainable scenario, to be selling fuel at or below cost and only time will tell if it was a successful strategy for petrol retailers in Adelaide.

· At first glance the latest monthly inflation reading is concerning especially given that the annualised rate rose from 3.6 to 3.8 per cent. But a closer look at the data suggests that inflation remains at present well contained but a watching brief. The surge in the monthly inflation number was largely due to the flood effect. TD securities noted that “Due to an ongoing lack of supply from the Queensland floods and Cycle Yasi, the price of fruit and vegetables rose by 11.3 per cent in March, following a 5.1 per cent rise in February”. No doubt as supply of fresh produce improves in coming months prices are likely to ease. As the Reserve Bank has highlighted on many a occasion it is willing to look through the short-term effect of the natural disasters and focus on the longer term fundamentals.

· Interestingly if you strip out volatile elements like fruit and vegetable prices, and petrol then inflation is almost non-existent in Australia. Over the past eight months inflation has been negligible and the annualised core result is holding at a more sedate level of 2.1 per cent. Even the three month annualised rate of inflation is amazingly just 1.2 per cent.

· Of more of a concern was the 5.3 per cent increase in the price of automotive fuel, which added to the 1.6 per cent rise in February. From the Reserve Banks perspective it does not want to see higher prices feed through and become entrenched in other parts of the economy.

· The labour market has been the shining indicator over the past year and the latest job ads data suggests that eemployment growth is likely to be remain healthy in coming months. The ANZ job ads series has once again shown moderate growth. Importantly while the labour market is likely to strengthen in coming months it is unlikely to see robust growth akin to 2010 – especially given that the domestic economy has lost momentum in recent months.

· The labour market will be one of the key hot issues that the Reserve Bank will be focusing on in coming months. As long as the supply of labour remains adequate, the Reserve Bank can remain on the interest rate sidelines.

What do the figures show?

Petrol prices:

· According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 0.6 cents a litre to 143.6 cents a litre in the week to April 3. The metropolitan price rose by 0.7 c/l to 143.0 c/l, while the regional average price rose by 0.3 c/l to 144.8 c/l.

· Average petrol prices across states over the past week were: Sydney (down 2.7 cents to 139.8 c/l), Melbourne (up 2.3 cents to 143.5 c/l), Brisbane (up 1.5 cents to 146.9 c/l), Adelaide (up 6.9 cents to 141.7 c/l), Perth (up 0.6 cents to 143.9 c/l), Darwin (up 1.5 cents to 148.5 c/l), Canberra (down 0.3 cents to 146.9 c/l) and Hobart (up 0.1 cents to 149.9 c/l).

· The national average wholesale (terminal gate) has risen to a fresh 29-month high of 135.7 cents a litre today, risen by 1.3 cents a litre over the past week.

· Last week, the key Singapore unleaded petrol price rose by US$2.46 (2.0 per cent) to US$125.06 a barrel. In Australian dollar terms the Singapore gasoline price rose by a much more sedate $0.78 (0.7 per cent) over the week to $120.89 a barrel.

Inflation gauge:

· The monthly inflation gauge rose by 0.6 per cent in March after lifting by 0.2 per cent in February. The annual rate of inflation rose from 3.6 per cent to 3.8 per cent.

· Excluding volatile items like petrol and fruit & vegetables, the inflation gauge rose by 0.2 per cent after rising byu 0.1 per cent in February and remaining unchanged for the two prior months. The annual rate of core inflation eased from 2.3 per cent to 2.1 per cent. The three-month annualised rate of inflation rose from 0.3 per cent to 1.2 per cent.

· TD Securities noted that “Contributing most to the overall change in March were further outsized price rises for fruit and vegetables, automotive fuel, and alcohol and tobacco. These were offset by small falls in household supplies and rents. Due to an ongoing lack of supply from the Queensland floods and Cycle Yasi, the price of fruit and vegetables rose by 11.3 per cent in March, following a 5.1 per cent rise in February. Consistent with rising oil prices on enhanced geopolitical risk, the price of automotive fuel rose by 5.3 per cent in March, building on the 1.6 per cent rise in February.”

Job advertisements:

· The combined number of internet and newspaper job advertisements, as tracked by ANZ, rose by 1.3 per cent in March after a 1.2 per cent increase in February. Internet job ads rose by 1.4 per cent in the month, while newspaper job ads fell by 0.4 per cent. In annual terms job ads are up 19.2 per cent.

What is the importance of the economic data?

· Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum. National average retail prices are calculated as the weighted average of each State/Territory's metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions.

· The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to “provide a timely and accurate monthly measure of inflation in Australia”. The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.

· The monthly Job Advertisements release is a leading employment indicator. Employers only seek additional staff if business activity is strong, and more importantly, if they expect that conditions will remain favourable in coming months. It takes around 5-6 months for the new staff to be added to the payrolls. But a fall in job advertisements would have a more immediate impact on monthly employment estimates.

What are the implications for interest rates and investors?

· It is clear that rising petrol prices will boost the inflation rate in coming months. However there is not a lot that the Reserve Bank can do about changes at the petrol bowser or the floods in Queensland – a key driver of changes in fruit and vegetable prices. If underlying inflationary pressures remain contained, then the Reserve Bank can stay on the sidelines until well into 2011

· At present inflation remains under control, consumers and businesses are still refusing to borrow, house prices are recording modest falls and the sustained rise in petrol prices will add further pressure to household budgets – further slowing down spending. Added to which the strength of the Australian dollar is continuing to keep the price of imported goods extremely low. The Reserve Bank is unlikely to raise interest rates in the near term given the lack of momentum in the economy

· The risk for the Reserve Bank is if the higher prices becomes entrenched in the economy – particularly given the sustained improvement in labour market conditions and the potential impact on future wages.