A jump in fuel prices has contributed to a broader rise in inflation over the past few months, which could put upward pressure on interest rates.

The official ABS measure of consumer prices rose 0.8 per cent over the September quarter, with prices 3 per cent higher than a year earlier.

The quarterly rise was driven primarily by a jump in fuel (7.1 per cent) and new dwelling purchase (3.3 per cent) costs.

Rising energy costs have caught the attention of Steve Cassidy, who runs a truck mechanic business in Sydney’s west.

He runs a fleet of mobile mechanic vehicles that meet broken-down trucks and other machinery in and around Sydney.

“I think 12 months ago it was $1.20 a litre, and now today I was driving to work and it was nearly $1.60 a litre,” he told The Business.

This week the national average petrol price rose to a 13-year high and is at record levels in some cities. On its data, the ABS said fuel prices hit record highs in the September quarter.

Photo showing petrol price board at service station with e10 at 177.9 cents a litre.
Petrol prices in some cities, such as Sydney, are around record highs and nudging towards $2 litre in some areas.

Mr Cassidy spends up to $2,500 a month on diesel fuel, but said he was passing some of the increased costs on to his customers.

“The fuel has definitely increased but, then again, that’s something that we do on-charge, any travelling fees,” he explained, illustrating how rising fuel costs filter through the economy to other prices.

Mr Cassidy said his power bills had also risen 20 per cent, jumping by 49 per cent over the past 15 months.

“We absorb it because … it’s something that’s in the general running of the business,” he said.

“If it gets much higher, we’ll have to put our labour costs up to cover the costs of running the business.”

Building price pressures

But it is not just energy costs rising and putting increasing pressure on businesses to pass on price rises to customers.

Boodjera Construct manager Joel Heyting says companies like his have no choice but to absorb the rising costs.(ABC News: Rachel Pupazzoni)

Perth based construction manager Joel Heyting said the residential and commercial construction business he works for has been absorbing rising building materials costs.

“Were getting price rises every three to four months from timber to hardwood materials to fixings, everything just seems to be going up and up,” he lamented.

Mr Heyting said, because construction contracts are signed in advance, the increased costs for materials are currently being absorbed by builders like him, instead of being passed on to customers.

“You walk a fine line balancing covering your costs or pricing yourself out of work. It’s difficult,” he said.

Mr Heyting said the federal government’s HomeBuilder grant boosted construction demand and has driven up prices.

“To build a house, it’s just $40,000 more expensive, it’s not $40,000 cheaper with the grants, and everyone’s just trying to get their slice of the pie,” he added.

He told The Business, while price increases are not unusual, the rate of the increases this year has been significantly higher than normal.

“Every year, we would get, you know, a 3 or 4 per cent price increase, just matching inflation, but it’s just been neverending this year,” he observed.

“It’s just 15 per cent here, 10 per cent there, and it just keeps adding up.”

The ABS agrees.

“High levels of building construction activity combined with shortages of materials and supply disruptions have contributed to the largest rise in new dwelling prices since September 2000 when the GST was introduced,” the bureau noted in its report.

What will inflation mean for interest rates?

That flow through is one reason why the Reserve Bank’s preferred measures of price rises, which exclude the most volatile movements like fuel, rose by 0.7 per cent over the quarter and 2.1 per cent over the past year.

It is the first time in six years that those core inflation measures have been above the bottom of the Reserve Bank’s 2 to 3 per cent inflation target.

However, Sarah Hunter from BIS Oxford Economics said the Reserve Bank was unlikely to be rushing to raise interest rates on the back of these numbers.

“The transitory headwinds from higher commodity prices (particularly petrol) and global supply chain disruptions will continue, which will keep headline inflation at (or even above) 3 per cent in the near term,” she forecast.

“But as these factors are external, they are very unlikely to push the RBA into pulling forward the first cash rate rise, and their impact will fade over time as conditions normalise (through increased supply and/or moderating demand, as spending patterns shift away from goods).”

The Reserve Bank has been consistent in maintaining its view that official interest rates are unlikely to rise before 2024, although most banks have already significantly increased fixed mortgage rates from record lows seen earlier this year.

However, the longer high and rising energy charges are sustained, the more they will filter through to broader consumer prices as business are forced to pass their increased costs onto customers.

Already the rising cost of many imported goods is starting to filter through into the shops.

The ABS noted that global supply disruptions resulted in price rises for some items including furniture (+3.8 per cent), motor vehicles (+1.4 per cent) and audio-visual equipment (+1.8 per cent).

Although, good growing conditions and non-existent hospitality demand in locked down Sydney and Melbourne saw fruit prices drop (-8.3 per cent), while clothing prices slumped (-5.5 per cent) as retailers flogged off winter items that had not been sold earlier due to lockdowns.

Steve Cassidy is passing on part of his increased fuel costs to his customers.(ABC News John Gunn)

Mr Cassidy is like most Australians in expecting prices to keep rising, with surveys currently showing that inflation expectations are at a six-and-a-half-year high.

“There’s no two ways about it, and it’s just going to go up, and up, and up,” he said.

Extracted in full from: Inflation climbs on fuel and houses, pushing above the bottom of Reserve Bank target range – ABC News