The global shock of Russia’s invasion into Ukraine has yet to be fully realised financially but indications of unforeseen consequences are gradually appearing in Australia’s economy, especially in the form of higher petrol and food prices.
The EU has aimed to cut dependence on Russian gas and oil by as much as 80% this year with both US and UK banning Russian oil imports. This global supply shock has skyrocketed the prices of oil barrels to above $130USD a barrel, driving inflation higher and higher, toppling the still-fragile consumer confidence after the recent omicron COVID-19 wave. Higher costs of oil could hit households at the petrol browser and spill over to headline inflation – oil prices surged to 7 year highs with the average unleaded petrol price rising by 5% to a record $1.79/litre. In Australia, the market disruptions could ripple through supply chains with estimates of average petrol prices hitting $2.10/litre.
Furthermore, Ukraine being one of the world’s biggest exporters of agricultural products will see food prices being elevated as well. According to Raboank, Ukraine accounts for 12% of global wheat trade, 16% for corn and 18% for barley. A price spike could potentially act to tax growth for consumers, having a negative impact on confidence and consumption – potentially forcing the RBA to reconsider interest rate hikes at an earlier period than predicted. However, raising rates will not alleviate the supply shortages, and would have little impact on stemming these price pressures.
However, a surge in the oil price would result in a rise in coal and liquified natural gas (LNG) prices as buyers searched for energy substitutes. As a major exporter of both, Australia’s external accounts would benefit from that rise. Other commodity prices such as grains, fertilisers and metals have soared, propelling the AUD to its highest in 3 months at $0.735 USD.
International Monetary Fund (IMF) last weekend warned price shocks would “have an impact worldwide, especially on poor households for whom food and fuel are a higher proportion of expenses”. If the conflict continues to escalate, the economic damage would have devastating impact on Australia and the global economy.
