Petrol hitting $2 a litre is but a relatively small part of the inflation explosion being witnessed in Australia and around the world.
Sure, the petrol price surge is hitting the hip pocket of motorists, but the impact on transport companies, airlines and many manufacturers will show up when they inevitably pass on their highest costs to consumers.
The issue is compounded by the fact the economy now is strong enough for businesses to easily pass on those higher costs. Consumers are still spending freely and seem to have had only a minor response to rising prices.
If the economy was sluggish and the unemployment rate was edging up, many businesses would have difficulty passing on these higher costs, simply because consumers would pare back their spending.
This is not the case now with the recent GDP figures confirming a robust rate of growth and the labour force data pointing to a sub-4 per cent unemployment rate in the months ahead.
Making the inflation outlook all the more uncomfortable is the runaway price increases for many other commodities – nickel, coal, beef, wheat to name a few. Just about every item is seeing massive price increases.
And while the effect of the floods on food prices will be temporary, the disruption for vegetable growers and supplies and the effect this will have on prices in the coming weeks and months will be huge.
It is difficult to pinpoint, at this stage, how high inflation will go and how long it will stay well above the 2 to 3 per cent target of the Reserve Bank (RBA).
Already, annual inflation is 3.5 per cent and has been 3 per cent or more for the past nine months.
Some simple work on what we know about prices, wages and the overall state of the economy, suggests inflation is set to exceed 6.5 per cent by the June and September quarters of 2022, and will stay above 5 per cent through to the early part of 2023, and perhaps longer.
This would be the highest rate of inflation since 1990, exceeding the 5 per cent level at the time of the last commodity boom in 2008 and then the era when the goods and services tax was introduced in 2001 when annual inflation hit 6.1 per cent.
It is an extraordinary time to see this inflation pick up.
It has the potential to distort the way the economy functions. It will have a negative impact on household budgets – even if wages growth picks up in response to the low unemployment rate.
It will pressure margins for many businesses, which may hamper their investment plans.
This is why high inflation is such a pernicious thing and why it is vital the RBA uses its monetary-policy tools to keep inflation in check and trend towards its target band.
Indeed, it should also be noted that some part of the inflation problem at the moment is due to the RBA pig-headedly maintaining a record low 0.1 per cent rate and the fact it delayed ending its extreme quantitative easing until last month.
It is as much the strength in demand as any supply-side shocks that is fuelling this once-in-a-generation inflation surge.
And it brings into serious question the complacency of the RBA in tackling the inflation disaster as it sits on its hands with the cash rate stuck at a record low.
One possibility is that the central bank and its board are holding off the inevitable interest rate hikes until after the election, which is scheduled for May.
The politicisation – if that was the case – would be scandalous and damaging to the economy.
It is interesting to note that all nine members of the RBA’s board have been appointed by the current Coalition Government.
With inflation surging, the unemployment rate falling to historical lows, with the bulk of the world’s major central banks already hiking interest rates, it is odd the RBA has not yet acted, and its public utterances suggest it is in no hurry to act.
There is no doubt, on any sober analysis of the economy and inflation, the RBA needs to start lifting interest rates.
The problem of it failing to do this now is that it will unleash even higher inflation over the next 12-24 months that will require yet higher interest rates than would otherwise be the case if it had started its hiking cycle earlier.
A cynic might note that that will be a problem for the next government, not the current one.