Aussie drivers facing $2.46 per litre by late May as new Westpac report warns of inflation surge

Australian petrol prices could climb back up to $2.46 per litre by late May, as global energy uncertainties and a volatile Middle East conflict continue to pressure inflation, economists warn.

Westpac economist Justin Smirk said the ongoing geopolitical tensions, including an all-out aerial assault on Iran by Israel and the US, have prompted the bank to model multiple scenarios to gauge the impact on fuel prices and inflation.

“Uncertainty is inherent in economic forecasting, and we often face a situation where what we think may be the most likely outcome is not always the desired one,” Mr Smirk said in a video update on Thursday.

Westpac’s scenarios range from a baseline before the conflict, a one-month closure of the Strait of Hormuz with minimal damage, to a two-month closure with some infrastructure damage and slow recovery.

Current forecasts were based on the two-month closure scenario, but the recent two-week ceasefire and the claimed reopening of the Strait could lower energy prices if it holds.

“Now this is obviously good news and a positive risk relative to the baseline we outlined last week, should the ceasefire hold,” Mr Smirk said.

“A faster opening of the Strait of Hormuz could result in lower energy prices than we currently have in our forecasts.”

Despite the potential upside, crude oil is still expected to average around $US120 per barrel in the June quarter, with Brent currently trading under US$100 per barrel.

Even with reductions in the Australian fuel excise, unleaded petrol is projected to peak at $2.46 a litre in late May, with a further 26-cent increase when excise returns to normal.

The impact on inflation is expected to be noticeable.

Westpac forecasts that consumer prices could rise by about 1.5 per cent in the March quarter, with a further 1.9 per cent lift in June, pushing annual inflation to around 5.4 per cent.

Businesses are passing on fuel costs faster than usual, sometimes through fuel surcharges or outright price hikes, raising concerns for core inflation.

Core measures are expected to climb to 4 per cent by September and remain high through the end of the year, staying near the top of the Reserve Bank’s target range.

With fuel prices rising 35 per cent in March, the monthly inflation rate could hit around 6 per cent in May or June, while monthly core inflation is projected to peak at about 4 per cent in the second half of the year.

On monetary policy, the RBA is expected to respond with 25 basis point rate hikes in May, June, and August, but much depends on whether the ceasefire holds and energy prices fall faster than expected.

“Then again, the conflict could reignite,” Mr Smirk said.

“Supply chain disruptions could last longer, energy prices hit higher, and we see greater paths through to final prices.”