Fuel Rose 23.6% in a Year. Now It Could Lift Your Mortgage Too

Next Tuesday the Reserve Bank hands down its interest rate decision at 2.30pm, half an hour before the Melbourne Cup jumps. And one of the main reasons economists are tipping bad news for borrowers is sitting in your fuel tank.

Wednesday's numbers in plain English

The Australian Bureau of Statistics released its September inflation figures on Wednesday. Prices rose 4.3 per cent over the year, up from 4.0 per cent in August. Automotive fuel (petrol, diesel and LPG) was up 23.6 per cent on a year earlier. It rose 9.4 per cent in September alone, on top of a 14.8 per cent jump in August.

Rachael McCririck, the ABS head of price statistics, said September's fuel rise was "driven by higher world oil prices". Transport as a whole rose 8.7 per cent over the year, the second biggest contributor to inflation after housing, and fuel was the main reason.

Westpac economists Justin Smirk and Neha Sharma estimate fuel added about 0.3 percentage points to September's 0.8 per cent monthly rise. That's more than a third of the month's inflation coming from an item that makes up just 3.5 per cent of the ABS basket.

Here's what the Reserve Bank will dwell on. Take out fuel and fruit and vegetables and annual inflation is still 3.7 per cent. The trimmed mean, the RBA's preferred measure of underlying inflation, sits at 3.6 per cent. Both are above the bank's 2 to 3 per cent target band, so petrol isn't the only problem. It's just the loudest one.

Some capitals copped it harder

The ABS breaks transport inflation down by city, and the spread is wider than you might expect. Adelaide and Darwin both recorded 10.6 per cent. Perth, Hobart and Canberra came in at 10.4 per cent. Sydney and Brisbane were on 8.3 per cent, with Melbourne the lowest at 8.0 per cent.

The ABS doesn't say why the smaller capitals ran hotter, but a gap of 2.6 percentage points is real money if you drive to work every day.

From 167 cents to 236 cents in four months

According to the ACCC's weekly monitoring, petrol across the five biggest cities averaged 236.2 cents a litre on 21 October. That was down 5.7 cents on the week, but still 65.3 cents higher than on 20 February, about a week before the conflict between the United States, Israel and Iran escalated.

From 1 April, Canberra cut fuel excise from 52.6 cents to 20.6 cents a litre, and by 10 June the five city average had slipped back to 166.6 cents. The cut was halved from 1 July and ended at midnight on 2 August, when excise returned to about 53.7 cents after indexation. August's 14.8 per cent jump in the fuel index carried both the higher oil price and the tax coming back at once. The federal government has ruled out another immediate excise cut.

Going back a few decades

The ABS has tracked fuel prices in the CPI since 1974, and its records put this year in perspective.

The biggest annual rise on record came in September 1979, at 48.4 per cent, during the oil shock that followed the Iranian revolution. (Iran at the centre of an oil shock. Sound familiar?) Iraq's invasion of Kuwait pushed fuel up 35.6 per cent in the year to December 1990, and Russia's invasion of Ukraine delivered 35.1 per cent in the year to March 2022.

Today's 23.6 per cent happens to match exactly the figure recorded in September 2000, the quarter the GST arrived. It's also a touch under the 25.4 per cent of September 2008, just before the global financial crisis sent fuel prices down about 20 per cent.

So this is a big shock, but not a record one. What makes it different is how long it might last, and where interest rates already sit.

Australia has paid more than most

Compared to other countries, Australian drivers have copped one of the heaviest bills. Analysis by the Centre for Research on Energy and Clean Air, reported this week, estimates extra spending on petrol and diesel since late February works out to about $550 for every Australian. That's more than six times the global average of $85, and only the United States and Canada fared worse. It's national fuel spending divided by the population rather than a bill every motorist has paid, but the ranking is telling.

The reasons are familiar: Australia imports around 90 per cent of its fuel, runs just two refineries, and plenty of us drive long distances with little public transport outside the big cities.

The double hit, in dollars

The practical upshot for your wallet is a squeeze from two directions.

At the bowser, a 50 litre tank costs about $32.65 more than it did in February at the ACCC's five city average. Fill up once a week and that's roughly $141 a month.

On the mortgage, Canstar estimates a borrower with a $600,000 loan would pay about $92 a month more if the RBA lifts rates by a quarter point next week and the banks pass it on in full. Across five hikes this year, Canstar puts the total increase for that borrower at around $456 a month.

Put those side by side and the extra fuel bill for one car filled weekly already outweighs next week's possible rate rise. Add a second car and it isn't close.

The cash rate is 4.60 per cent after the RBA's fourth increase of the year on 29 September. Westpac says it holds "to the view that the RBA will raise rates again at the November meeting". CommBank's Belinda Allen expects a quarter point rise to 4.85 per cent, adding that "the key question is whether four hikes this year is enough". Governor Michele Bullock has said global energy prices are now much higher than the bank assumed in August.

Why the RBA cares about something it can't control

The Reserve Bank can't reopen the Strait of Hormuz. What worries it is fuel leaking into everything else. Every truck that delivers groceries, parcels and building materials runs on diesel, and diesel prices in Sydney averaged 280.4 cents a litre on Monday, according to the NRMA. When transport costs stay high for months, businesses pass them on, and that's the kind of inflation interest rates are meant to fight.

There's no sign of a quick fix. Brent crude settled near US$117 a barrel last Friday, its highest in about six months, after attacks on shipping in the Strait of Hormuz reportedly hit a record this month. Australian pump prices typically lag world prices by one to two weeks. The NRMA expects Sydney unleaded, which averaged 236.0 cents on Monday, to ease into the low to mid 230s this week on falling wholesale prices, but Friday's crude spike hasn't reached the bowser yet.

The bigger picture

Treasurer Jim Chalmers told a Citi economic forum that futures markets aren't pricing a return to the oil prices seen before the conflict until 2030. If that holds, expensive fuel stops being a blip that can be waited out and becomes a cost that sits in household budgets, and in the inflation figures, for years.

That's the real story behind Tuesday's decision. The Cup will be run in a little over three minutes. The fuel bill will hang around much longer.

What to do this week

Keep an eye on 2.30pm Tuesday. For a lot of households, it'll matter more than the race.