"As the initial wave of inflation from the global energy crisis arrives in Australia, economic policymakers face a series of invidious choices over coming months to manage the emergence of stagflation," said Innes Willox, Chief Executive of the national employer association, Australian Industry Group.
March inflation data shows a jump in headline CPI from 3.7% to 4.6% p.a., one of the most rapid increases in inflation ever recorded in Australia. Fuel prices were the primary contributor, with petrol rising 33% and diesel 41% in the month. This data is consistent with Treasury modelling that suggests inflation will reach 5.0% by the middle of this year.
"While expected, this inflation data reveals the scale of the economic challenges Australia must now confront. Fuel prices have pushed inflation – which was already too high – to intolerable levels. And more is to come, as the impacts on plastics, fertilisers, construction materials, transport costs and more begin to appear in April and May," Mr Willox said.
"In the months ahead, household incomes will sink and business costs will dramatically rise, just as they did in 2022. But unlike 2022, the economy is not on the upswing. The energy crisis will have major impacts across industry that clearly dampen economic activity in the time ahead. Stagflation is no longer a risk to be avoided, but a reality to be managed.
"The RBA now faces a difficult choice when it meets next Tuesday. It is really Hobson's Choice, where there is only one alternative. With inflation well outside the target band and worse to come, it has little choice but to raise rates. But with the economy sure to weaken, this risks pushing us closer to recession.
"The Federal Government cannot leave this for the RBA to solve alone, or work against monetary policy settings. The Government must act decisively in the forthcoming budget. Government spending – measured as public final demand as a share of GDP – reached 28.5% last financial year, its highest level on record," Mr Willox said.
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