OPINION: The Ukraine crisis will boost Australian inflation as in other countries. But as an exporter of commodities, our real national income will benefit from the Russian boycott.
In the 1970s, the OPEC supply oil shock raised inflation and cut real incomes. The Chinese demand boom after 2000 raised Australian inflation and real income. Thewill also boost Australian inflation and real income, while other nations’ real income will be cut.
Russia and Ukraine together are major producers of gas, coal, wheat, barley, food oils, fertiliser, wood, aluminium, nickel, copper, titanium, palladium, gold, neon gas, vanadium and cobalt., as it is a large importer of these commodities. With imported gas the swing fuel for European electricity, it faces a huge energy price shock. It will suffer both an inflation spike and a drop in real income.
In contrast to the 1970s OPEC oil price supply shock, we are now a major energy exporter of gas. A wide range of our export prices benefit from the Russian boycott. A recession overseas would have some negative impacts, but Australian resource exports will take market share from lower Russian exports even if global demand is weak. In addition, Australian inward tourism has already been decimated by the pandemic, and education earnings took a hit hard. They will not be a new drag on Australian output if world growth slows.
The Australian dollar has been held down despite rising commodity prices over 2021 by the tardiness of the Reserve Bank in tightening policy. One way to spread the benefits of rising export prices to the general community is for the Australian dollar to rise, so that import prices fall and inflation is contained. Australian policy should be tightened relative to other countries over 2022 and the Australian dollar allowed to rise with commodity prices.