The not-so-good oil on inflation

Unfortunately, the Aussie dollar is falling just when we need it to be strong to pay for essential imports

- Alex Dunnin

Australia may be beginning to transition its economy off fossil fuels to renewable energy but, like it or not, as a nation we're still hogtied to global oil. It makes the oil price still one of the best economic indicators there is.

For evidence of this, look no further than the September 2023 consumer price index inflation figures that were released on October 25. They showed that while the trend in the rolling 12-month CPI figures is down, the quarterly uptick in inflation has economists all over the country worried that Australia's fight against inflation is far from over.

In fact, a second battleline has opened - one that pits us against global forces much bigger than anything our local policymakers can do much about. Worse still, this new battleline has three aspects, each of which is diabolical: rising bond yields around the world, the rising oil price and the falling Australian dollar.

And then there's the global perception that despite what Australians think about their high interest and mortgage rates, which are now double what they were a year ago, international investors have lost their taste for the Australian dollar because they think our interest rates have the opposite problem: they aren't high enough.

Bond yields are the interest rates that investors receive when they lend money to governments. They matter because they set the price for everything else. At the end of October, bond yields on US 10-year Treasury bonds were 4.9%, meaning they've climbed by 25% in less than a year. Yields on Australian 10-year government bonds are now about the same level.