'Risk of recession' as inflation jumps and interest rate hike looms | The Business | ABC NEWS

Fixing cars is costing more, forcing this car mechanic into some difficult decisions.

The oil filters we were paying $5 for are now $10.The air filters that we were paying $30 are now $50, you know.And we have to pass that on, unfortunately.I can't absorb that.

Sean Marnie says the war in the Middle East has hit home, and it's seen his business costs surge.

It was probably two and a half weeks ago when my oil rep came past and started telling me that prices were going up across the board.

Official figures highlight the recent spike in prices.Inflation jumped 1 .1 % in March and 4 .6 % for the year, which is the highest it's been since September 2023.A big contributor was fuel, up 32 .8 % in March alone, the strongest monthly increase since the start of the data series in 2017.On average petrol rose 33 % to $0 .228 a litre.Premium unleaded was up 30 % while diesel jumped 41 % to $0 .256 per litre.Australians were also hit with higher electricity prices as energy rebates were used up.

Rents rose and the cost of building new homes went up as builders passed on higher labour and material costs to customers.

We do understand that people are under pressure.That's why we cut the fuel excise.That's why we're providing cost of living help.That's why we're providing additional tax cuts.

The cost of fuel has been falling since the excise was halved and isn't included in the latest inflation figures.But it's only in place for three months.

We do need obviously the war to end and end permanently.That is the first and most critical thing.And then we are obviously hoping that prices will get back to those pre -war levels, but it may take some months.

The government warns the inflation pain may get worse.

This war could drive inflation up even higher before it comes back down again.

That's hard to hear for some Australians already cutting back.

We have a diesel, so we very rarely use it now.I'm a cyclist, I use my bike all the time.

We can't go out on meals, we can't go out on dates, we can't go on anything like that because of the prices of everything these days.

Even the Reserve Bank's preferred measure of inflation, the underlying rate, is still above its target band of between 2 and 3 per cent.It's more bad news for millions of households, with the Central Bank widely expected to hike interest rates next week.

That'll probably be the last hike by the RBA.But the longer this conflict in Iran goes on, the more likely more rate hikes are needed.

But those higher interest rates will hit households already under the pump.

We think there's a risk that Australia could tip into a recession, but it's not our central case.Our central case is we see one quarter of contraction in GDP.And we see that because we think that high inflation Higher costs of living, higher fuel costs are going to see the consumer pull back quite sharply in the second quarter.

And the anger, for some, is building, with seemingly endless cost of living pressures.

We get penalised as mortgage holders because the RBA suddenly wants to smack the 30 % of Australians who have mortgages as their get -out -of -jail -free card for inflation.

A further squeeze for already stretched households.

The March CPI rounds out the year's first quarter print for inflation, with the quarterly series, and especially the trimmed mean measure, largely looking through volatile items such as fuel, and it's the data point favoured by the Reserve Bank when setting interest rates.For more, AMP's Deputy Chief Economist Deanna Messina joins me.Welcome.If we looked really hard to findsome good news, would it be that the quarterly trim mean measure did come in slightly under the RBA's forecast?

I think it is good news, and also because the Reserve Bank itself was expecting the quarterly trim mean to be 0 .9 % over the quarter, and it came in at 0 .8%.If we look at the past three quarterly numbers, we had trim in the September quarter of 1 per cent.Then we had 0 .9 in the December quarter.Now we've got 0 .8 in the March quarter.So as things stand before the war in the Middle East, actually, we had been seeing that trim mean inflation was peaking, which is good news.

But with rising fuel costs now being passed through to the prices of everyday staples, by how much do you expect that underlying trimmed mean measure will jump in the second quarter?

So in the second quarter, we think that annual growth will be more like 3 .8 % in the trim mean.So it's about 0 .4, maybe 0 .3 percentage points above where it would have been if the war never erupted.So it is a bit of an increase, but I guess it's not that significant, although this is assuming that oil prices start to stabilise in the next few, well, in the next few weeks, basically, because if we don't get the resumption of oil coming through the Strait of Hormuz, the world economy will be in a much bigger problem than it is right now.

The RBA hiked by 25 basis points in the past two meetings, and some argue that the elevated fuel prices are doing the work of another interest rate rise for the RBA.Do you believe the RBA will hike next week?

I think the RBA will hike next week.And the main reason is basically that inflation was already a problem before the war started.And that's why we saw the February rate rise.And I do think that the war is adding this additional flow and effect to inflation that the RBA desperately wants to avoid.It does have a bit of PTSD after the COVID pandemic when what was initially a supply shock and meant to be transitory started becoming a much more permanent structural increase in inflation.We've seen inflation expectations increase.

The RBA is worried that they may get unanchored.We're not there yet.But this is a concern.And I think we can't rule out the possibility of another rate rise later down the track, maybe in August.It's not a done deal, but we have to think of that as a possibility.

So if the RBA does hype once or twice with consumer sentiment dropping, business confidence plummeting and house prices in the major capitals starting to decline, does it look as though the RBA is or has decided it needs a downturn to get inflation under control?

Hopefully not.I don't think we'll necessarily need to go down that path, but it's a risk, I suppose.We've had two rate hikes and the increase in petrol prices, the 30 per cent increase to fuel, petrol and diesel.So for the average consumer with a mortgage in Australia, it's about a $300 hit a month in extra payments.Now, that is a sizeable hit to consumers.Consumer spending is going to soften.

But hopefully it doesn't soften too much that it's going to cause a bigger downturn in the economy.A recession or a significant growth downturn in Australia is not our base case right now.However, if oil prices remain over $100 a barrel, which is basically doubling from where they were before the war, then that could be a possibility.

You've already said that we could see yet another interest rate hike beyond next week.That would take the cash rate past 4 .35 per cent, which was the peak of the last cycle.Where could it end?How much higher could the RBA take the rate?

Our base case for now is that the cash rate could peak at 4 .6 per cent if we get another two hikes from here.I think if we get the cash rate above that, Australia will be in more of a problem because we know consumers are sensitive to variable interest rate increases because a lot of consumers borrow on variable rates in Australia.We had that period during COVID where a lot of people were taking out fixed rates and those have now rolled off.So if we get rates towards 5 % we could be in for more of a problem in the economy.But we're not there yet and hopefully we don't have to get there.The labour market is still in really good shape.

The unemployment rate is low at 4 .3%.That is a good source of strength for consumers and also we've had all these positive wealth effects because home prices and asset price inflation has been strong.So that's another positive for consumer spending too.Okay, thanks for coming in Deanna Messina.Thanks Kirsten.