Freshly released Consumer Price Index (CPI) figures show annual inflation dropped to 4% in May from a high of 4.6% in March, but as the Iran conflict has shown, Australia remains highly vulnerable to global oil supply risks.
The latest drop can be fully attributed to a reduction in the increase in transport costs, as oil prices decreased and fuel excise cuts remained in place. This trend could still reverse in the next few months, with the fuel excise relief only partially extended till August, and amid uncertainty over how soon oil flows from the Middle East will recover. Prices for refined oil products, which Australia is mostly reliant on, are particularly hard to predict.
Then there is the question of when the next oil price shock will hit us, and how exposed we will be when it hits.
Since 2000, oil prices have become highly volatile, in part due to frequent geopolitical tensions, as well as the low price elasticity of oil demand.
In that period, oil prices increased by about 6.9% a year, well above the annual CPI increase of 2.8%. Oil costs grew even more, by about 8.9% a year, as oil use grew alongside oil prices.
