Automotive fuel in the CPI

Automotive fuel series in the CPI and important events affecting fuel prices and inflation

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Released
23/03/2021
Source
Consumer Price Index, Australia, December 2021

Introduction

The Consumer Price Index (CPI) is an important measure of inflation in the Australian economy. The CPI measures the price change of a ‘basket’ of goods and services purchased by Australian households. According to the 2015-16 Household Expenditure Survey, on average, Australians spend approximately $2,300 on automotive fuel each year. This is reflected in the measurement of the CPI with a weight of 3.3 per cent of the CPI basket.

Automotive fuel prices are often volatile, which can have a significant impact on the rate of inflation measured by the CPI. A recent example of this was following the outbreak of COVID-19, where prices for automotive fuel fell 20 per cent in the June 2020 quarter, contributing nearly half of the record 1.9 per cent quarterly fall in the CPI. Following the low point in mid-2020, fuel prices have increased 45 per cent up to the December 2021 quarter.

This article explains how automotive fuel is measured in the CPI and provides a summary of some important events which have impacted fuel prices in Australia.

A brief history of Automotive fuel in the CPI

Automotive fuel has been included in the CPI since the series was first produced in 1948. Automotive fuel was initially part of the Fuel and light sub-group within the Household supplies and equipment group in the CPI. In 1974-75, the ABS conducted the first Household Expenditure Survey which provided detailed data on all areas of household consumption expenditure. In 1976, an Automotive fuel series was introduced into the CPI within the Transportation group. Over the years, the contribution of Automotive fuel has been between 2-5 per cent of the CPI basket.

Price collection

Prior to 2002, ABS field staff travelled to collect fuel prices from fuel retailers. Prices were obtained five working days a week from approximately 500 outlets across all capital cities. From 2002 onwards, automotive fuel prices have been obtained monthly from administrative pump price data in each capital city. Prices from all major outlets, and some independent outlets, across a wide range of locations within each capital city are collected each day, including weekends and public holidays. Approximately 500,000 prices are collected each month covering a range of fuel types including unleaded petrol, diesel and LPG.

Australian fuel prices

Australia is dependent on imports to meet domestic demand for transport fuels. This exposes Australian fuel prices to the impact of production decisions made by the Organisation of the Petroleum Exporting Countries (OPEC), which generates approximately 40 per cent of the world's total crude oil production.

Australian fuel prices are strongly linked to Singapore refined petrol and diesel price movements. Significant changes in the price of fuel are largely a result of changes in world oil prices and the level of global oil production. Domestic factors such as retail margins and the level of retail competition within the geographic location also impact fuel prices in Australia.

Other factors and costs affecting fuel prices include exchange rate changes, shipping and insurance costs, port charges, terminal storage and refiner and wholesale margins.

Important events impacting the price of Automotive fuel

Automotive fuel is one of the most volatile series measured in the CPI, due to the aforementioned factors. This high level of volatility means that it is often a main contributor to the CPI headline movement. Graph 1 shows major international events significantly impacting Australian fuel prices and the magnitude of their impact on the CPI's Automotive fuel series. Graph 1 also shows the impact the price of fuel has on the headline CPI movement, which can be seen by the relationship between the annual movements of the two series.

1979 Oil Crisis
1990 Invasion of Kuwait by Iraq
1999 - 2000 Recovery from 1997 Asian Financial Crisis (AFC)
2008 Global Financial Crisis (GFC)
2014 Strong production in US and Russia coupled with OPEC's decision to maintain production
2020 COVID-19 lockdown
2021 Recovery in global crude oil demand and limited global supply

 

1972 - 1979

The early 1970s saw the first global oil price shock, resulting in fuel prices increasing by 25 per cent in 1975. Following a brief period of disinflation in the latter half of the 1970s, a second global oil price shock in 1979 saw fuel prices rise almost 50 per cent, resulting in a further acceleration in inflation.

1980 - 1988

The Iran-Iraq war, which lasted from 1980 to 1988, saw oil exports decrease from the Middle East region (a key export market), which caused fuel prices to rise further in the first half of the 1980s. Price falls in the mid and late 1980s were a result of an increase in the supply of oil following an expansion of oil production by Saudi Arabia.
 

1990 - 2000

The Iraq invasion of Kuwait caused oil production to decrease, leading to an increase in fuel prices in 1990. This was a temporary impact as oil production, and subsequently fuel prices, were relatively stable throughout the 1990s.

Asian demand for oil increased in the late 1990s, following the economic recovery from the Asian Financial Crisis, which resulted in a rise in global oil prices. This coincided with the introduction of the Goods and Services Tax (GST) in Australia in 2000. The GST had only a small impact on fuel prices due to a simultaneous reduction in the fuel excise levy.
 

2001 - 2008

From 2001, annual fuel price increases remained above 5 per cent as oil production declined and Asian demand continued to increase. However, the Global Financial Crisis (GFC) in 2008 led to a large fall in oil prices. Global uncertainty and rising unemployment in many countries during this period led to falling demand for oil, which saw fuel prices fall 20 per cent in 2009.

2014 - 2016

Following a recovery from the 2008 GFC, oil prices fell again between 2014 and 2016 reflecting strong production in the US, which saw the highest level of US oil output in more than 100 years. This, coupled with Russia's and OPEC's decision to maintain their oil production level, resulted in a global oversupply of oil.

2020 - 2021

The COVID-19 pandemic in 2020 saw another large fall in fuel prices due to lockdowns, both domestically and in countries across the world, forcing businesses to close and people to stay at home. With travel restrictions in place, planes and cruise ships also sat idle. As consumer and commercial demand fell rapidly and significantly worldwide, this resulted in an oversupply of oil. Oil prices began to partially recover in mid-2020 as COVID-19 restrictions began to ease.

Continued global economic recovery and increases in general optimism from vaccine roll outs, as well as limited global oil production, saw fuel prices continue to rise in 2021, exceeding pre-COVID-19 levels to reach record highs by the end of 2021.

Automotive fuel price movement over the decades

Graph 2 shows how the Automotive fuel series has tracked over the past five decades. Across the 1980s, fuel prices increased at a faster rate compared to CPI inflation. During the 1990s, fuel prices were fairly stable, before rising more quickly during the 2000s and reaching a peak in 2008, just prior to the Global Financial Crisis. Following the GFC, fuel prices were more volatile with the 2008 peak only briefly being exceeded in 2014. A new record level for the Automotive fuel series was set in 2021.

Across the five decades, the increase in fuel prices was 60 per cent higher than the increase in the CPI: 1,597 per cent compared to 993 per cent.