Oil prices fuel inflation

World oil prices surged overnight, adding fuel to Australia’s inflationary pressures.

Crude oil futures rose by more than $1 , setting a new record price of $101.15 a barrel.

Local factors contributed heavily.

These included forecasts of heavy snow in America’s north-east and the weakness of the $US.

The $A, though, rose overnight, partly on expectations of further interest rate rises, to trade close to 93US cents.

That will help, a bit.

As we know, Reserve Bank and Treasury economists like to exclude so-called volatile items, like petrol prices, when they calculate what they call the nation’s underlying inflation rate.

And it is the Singapore price of crude oil, not the US price, which directly affects petrol prices in Australia.

However, oil is a global commodity. What happens, pricewise, in one market spreads, very quickly, to others.

And economists find it more difficult to exclude items, like oil prices, from their calculations, when price rises become persistent.

There are now signs that this is happening.

New records, for oil prices, have now been set on two consecutive weeks.

Last week’s record, now surpassed, was $US100.85 a barrel.

The Treasurer, Wayne Swan, admitted last night that underlying inflation in Australia has been “on the march” since the start of 2006.

He noted, too, that the Reserve bank has forecast that Australia’s inflation will remain above 3 per cent – the top of its target range – for the next two years.

Just about the last thing Australia needs now, is yet another surge in world oil prices.

The big question, of course, is will it add to pressure for another rise in local interest rates.

The answer, sadly, is yes.