This week saw the Federal Treasurer (the Hon. Jim Chalmers MP) publicly call on service stations to lower their retail prices given the recent drop in global oil prices. The call was notable in that it focussed solely on petrol prices and neatly stepped around more significant impacts on the cost of living such as rising mortgage repayments, rising weekly rents, rising food prices, and rising electricity prices.

“The most extraordinary aspect of the Federal Treasurer’s call this week is that fuel prices were already coming down significantly, as was being reported in numerous national media outlets at the start of the week”, said ACAPMA CEO Mark McKenzie

The cynics amongst us might suggest that the real motivation for the Federal Treasurer’s announcement is that he wanted to be seen to be doing something to reduce inflationary pressures on Australian Households – and the falling fuel prices were essentially the only good news on the horizon. This is particularly the case given recent news that mortgage repayments on the rise and statements from agricultural producers that milk prices and potato prices would rise sharply from this week.

“You might also reasonably conclude that falling petrol prices provided a ‘look over there’ opportunity for the Albanese Government as they responded to public calls for an extension in the halving of the fuel price excise concession beyond 28 September 2022 – the timeframe that was originally legislated by the former Morrison Government when the excise was halved to 22.1cpl on 30 March 2022”, said Mark.

“But that tactic is risky as it will only work if global oil prices stay where they are – and predicting what will happen with oil price movements in the next two months is a mug’s bet at the moment”, added Mark

But let’s put political speculation aside and consider why there is such a fascination with petrol prices in Australia at the moment – more so than at any other time in recent memory.

First, we must acknowledge that average petrol prices have touched record highs over the last 6 months. Petrol prices breaking through the psychological threshold of $2 a litre caused understandable concern and focussed the attention of motorists and media outlets alike, as they sought explanations on why fuel prices were rising in Australia.

The national discussion on petrol prices reached a crescendo in March 2022, on the back of a sharp rise in global oil prices and growing community concern about the risk of serious inflation – an economic phenomenon that had not been seen in Australia for more than 30 years. Linking fuel prices to the inflation story provided an early indication of the impact on Australian households – more so than for any other product purchased by consumers.

From that point forward, every TV news and online story about inflation has included a picture of a fuel price board – even if fuel prices were not the subject of the story. As a result, and in advance of a looming Federal Election, the former Morrison Government took the extraordinary step of cutting fuel excise in half. This move just increased the media attention on petrol prices.

“I have responded to more requests for media interviews on petrol prices in the last 6 months than I have in the last 7 years”, said Mark

“The level of media inquiry about petrol prices – and their contribution to inflation – has been bizarre, particularly when you consider the relatively small contribution of petrol prices to the key measure of inflation, the Cost Price Index (CPI)”, added Mark.

The recent release of the June 2022 Quarter CPI by the Australian Bureau of Statistics (ABS) revealed that the quarterly increase in CPI (to 30 June 2022) in transport costs – which includes fuel – rose by the highest amount of all groups measured (up 13.7%). But the report when on to state that the actual weighted contribution of the rise in transport costs to quarterly inflation was just 4.2%, which was significantly lower than the rise in other weekly household costs.

The ABS reported, for instance, that the factors that contributed to the 5.2% CPI result for the June 2022 Quarter included: Rental costs (up 6.7%), Furnishings and Household equipment (up 4.9%), Education Costs (up 4.7%), Food and non-alcoholic beverages (up 4.3%), and Health (up 3.5%). Within this context, it is worth noting that the CPI excludes home mortgage repayments in its calculations.

So why the extraordinary focus on petrol prices?

Those who criticise petrol prices justify their focus on the basis that they believe fuel prices are (a) a significant impost on the household budget, and (b) a non-discretionary (or non-avoidable cost) for Australian households and businesses.

So let’s test these two claims using data from the ABS Weekly Household Expenditure Survey (Unfortunately, this data is only collected every 6 years and so we have to rely on data for the 2015/16 financial year).

The 2015/16 ABS Survey tells us that Australian Households spent an average of $280 on housing costs (rates and rent etc), $237 on food and non-alcoholic beverages, $207 on transport (i.e. registration, car repayments, fuel, tolls, and public transport costs), and $172 on recreation. When you consider fuel alone (estimated at around $70 per week in 2015/16), fuel costs were the 6th highest weekly household cost.

Further, housing costs (excluding mortgage repayments) were 4 times higher than average weekly fuel costs. Food and non-alcoholic beverages were 3 times higher and Recreation costs were 2.5 times higher than weekly fuel cost expenditure.

“In truth, fuel costs are a relatively modest part of the Australian weekly household budget and so suggestions that the focus on fuel is justified by the ‘high contribution’ to weekly household expenditure is dubious to say the least”, said Mark.

The second suggestion that the focus on petrol prices is justified also appears invalid. Housing costs and food costs are also non- discretionary, perhaps even more so than fuel. The ABS 2015/2016 Data shows that these costs were four times higher and three times higher than fuel costs respectively.

“When you consider the facts, fuel costs are a relatively small part of the costs of living in Australia – they are certainly not the most significant and nor are they the highest non-discretionary area of weekly expenditure”, said Mark.

The above discussion ignores the impact of rising mortgage rates on household expenditure. The last two rate monthly rate rises alone added an average of $450 per month for someone with an average capital city mortgage of $600,000 (over 30 years) – roughly 5 times more than the average increase in monthly fuel costs experienced over the six months to 30 June 2022 (for an average two car household.

“Perhaps the only reason that fuel prices are being used in media stories about inflation is that they are a very transparent indicator as fuel prices are clearly displayed at every service station in the country – and so the movement in prices is very obvious,” said Mark

“I suppose price transparency and its consequent use as an indication of inflationary pressures is just something we will have to live with – but you would hope that our Federal Treasurer and the rest of the Albanese Government are focussing on the factors that are driving up inflation much more significantly than fuel prices,” concluded Mark