The latest inflation data from the Australian Bureau of Statistic revealed that, far from being over, Australia’s inflation fight is getting tougher. Data for May, released on June 24, showed that underlying (“trimmed mean”) inflation had risen from 3.4% to 3.6% for the previous 12 months. Although the headline CPI figure over the past year fell from 4.2% to 4.0%, the trimmed mean figure strips out the largest price increases and decreases, and is the figure used by the Reserve Bank to inform their interest rate decisions.

The Australian Financial Review (AFR) reported that Australia now has the equal highest inflation rate among major world economies, and equal second among all advanced economies (behind Iceland). The RBA’s target underlying inflation rate is the 2.5% midpoint of their 2-3% “flexible” band. Bond markets are now estimating a 50% chance of a further rise in official interest rates this year in response to persistent inflation. Importantly many economists continue to point to Australia’s inflation problem as being “homegrown” rather than part of a largely global phenomenon. Former head of the RBA’s research department told the AFR that domestic price pressures were the main factor behind Australia’s elevated core inflation and that “What’s been experienced in Australia is not a global phenomenon.”

Elsewhere in the Australian economy, investors and renewable energy groups have raised concerns about the government’s proposal to raise the capital gains tax for foreign investors in Australian renewable energy from effectively zero to 30% over the next four years. The rate is set to be 15% over a four-year transition period. Crucially, investments will not be grandfathered. This raises the prospect of reduced investment in the green energy transition and, indeed, an incentive to sell assets during the transition period. Treasury have estimated this could raise $2.4 billion in revenue over the four-year “forward estimates” period, but it may also make it harder for Australia to reach its ambitious renewables targets.

The big economic news for members in New Zealand and Australia was the signing of a tentative peace deal between the United States and Iran. President Trump inked the deal at the G7 summit in France in mid-June. The deal provides for a 60-day negotiating period and is, in essence, an agreement to make an agreement. It includes reopening the Strait of Hormuz, an end to US sanctions on Iran, and access to US$300 billion in reconstruction funds for Iran.

Brent crude oil prices have fallen from around US$96 at the start of June to $68 in early July, largely off the back of hopes that the deal will lead to a resolution of the conflict and increased global oil supplies through a reopening of the Strait of Hormuz. That said, prices could quickly reverse themselves if the 60-day negotiating period fails to produce a lasting deal. A major potential sticking point in negotiations is likely to be resolution of the status of Iran’s nuclear program and its existing stockpile of highly enriched uranium.

In managing the roughly 20% reduction in global oil supply (this was certainly 10 million barrels and as much as 20 million barrels a day of crude oil) stemming from the closure of the Strait, China reduced its own importation by four million barrels per day, Abu Dhabi exited OPEC and increased production by a million barrels a day, the US increased domestic supply by about three million barrels a day, and Venezuela (after the US intervention) increased supply from 200,000 barrels a day to 1.3 million.

If a permanent deal is reached the key issue will be whether the increased supply from countries like the US and Abu Dhabi persists or is reduced, and whether China will continue dipping into its reserves to reduce imports. A major driver of the future crude oil price will be whether countries around the world that have dipped into reserves will rebuild those reserves—potentially to materially higher levels than they held before the outbreak of hostilities in late February.

Since energy prices are a critical input into costs across almost all global supply chains, and for domestic businesses in Australia and New Zealand, the outcome of this process over the coming weeks and months will be a crucial determinant of domestic economic growth and inflation.