Assessing the Impact of Change in Petroleum Prices on Inflation and Household Expenditures in Australia

In this paper we examine three broad issues: (a) the expected impact of the recent petrol price rises on prices throughout the economy, (b) the hypothesis that the economy is now less susceptible to oil price rises than it was in the 1970s when the first major oil prices occurred, and (c) the likely distributional impacts of the petrol price rises? A modified input-output (IO) price model is used to simulate the impact of a two-fold increase in petrol prices on the sectoral and aggregate price indices in Australia. The 1996-97 and 1977-78 IO tables are used. Among the results is an estimated impact on the consumer price index of 1.8 per cent. Also, the same petrol price shock would have consistently larger price effects in the late 1970s than in the late 1990s. Further, using the 1998-99 Household Expenditure Survey, we find that the petrol price rises are regressive.