Australia\u2019s inflation rate has reached a three-year high due to surging oil prices flowing through the economy, with experts warning it could be a repeat of the 1970s \u201cstagflation\u201d problem.<\/p>\n
In a grim investment note, MLC senior economist Bob Cunneen says the effective shutdown of the Strait of Hormuz \u2013 a key waterway where 20 per cent of the world\u2019s oil passed through \u2013 could drag Australia back to a 1970s stagflationary period. <\/p>\n
\u201cThe global economy currently confronts the prospect of both rising inflation and unemployment because of this Iran war,\u201d he said.<\/p>\n
\u201cThis stagflation mix of both higher inflation and unemployment creates a major policy dilemma for central banks.\u201d<\/p>\n
Stagflation is the worst possible outcome for an economy as inflation continues to rise even as spending drops.<\/p>\n
It last occurred in Australia in the mid 1970s due to another oil price shock.<\/p>\n
Before the Middle East conflict, oil prices were about $US56 ($A80) per barrel, before temporarily touching $US120 (A$167) per barrel. <\/p>\n
For every $10 increase in the price of oil, Australians pay an extra 10 cents at the fuel pump.<\/p>\n
Mr Cunneen points out oil prices have already surged 97 per cent in US dollar terms this year, creating problems for motorists \u2013 although this has partially been offset by the government\u2019s decision to halve the fuel excise and give back the GST windfall. <\/p>\n
This follows previous warnings from The International Energy Agency in March, which said the Middle East conflict had created the largest supply disruption in history. <\/p>\n
Mr Cunnan\u2019s warning follows a call from HSBC chief economist Paul Bloxham that Australia will be in a stagflationary period for two of the next three quarters.<\/p>\n
\u201cAs we see it, a stagflationary shock has arrived,\u201d he wrote in a note to clients.<\/p>\n
\u201cCould it be genuine stagflation \u2013 like the 1970s? This depends on how persistent it is. And, importantly, on what policymakers do next.\u201d<\/p>\n
Mr Bloxham stopped short of calling this a repeat of the 1970s, but said risks were rising for policy makers.<\/p>\n
\u201cAustralia faces a stagflationary shock, and we expect that outright stagflation is a rising risk. The aim for policymakers ought to be to keep it brief and optimal policy settings could help to make it so,\u201d Mr Bloxham said.<\/p>\n
He said inflation was already running above target \u2013 which was at 3.7 per cent prior to the Middle East war \u2013 meaning Australia was not well placed to deal with any negative shocks.<\/p>\n
\u201cBecause Australia\u2019s economy has little or no spare capacity, there is a higher risk than in many other countries that the sharp fuel-related rise in inflation will more quickly end up in higher inflation expectations,\u201d he said.<\/p>\n
Meanwhile, AMP\u2019s chief economist Shane Oliver believes Australia is currently in a stagflationary environment, albeit not as extreme as five decades ago. <\/p>\n
\u201cAt this stage we are only expecting a mild form of stagflation with only slightly higher unemployment,\u201d he said.<\/p>\n
However, Mr Oliver warned the longer the Strait of Hormuz remained closed the greater the risk of much higher oil prices and fuel restrictions, and hence recession and a significant rise in unemployment.<\/p>\n
\u201cIf this occurred it would likely act as a big drag on the property market,\u201d he said. <\/p>\n
Australia\u2019s entrenched inflation problem<\/p>\n
Morningstar market strategist Lochlan Halloway warns Australia has an inflation problem that is home grown and worse than the market is anticipating.<\/p>\n
Wednesday\u2019s official figures released by the Australian Bureau of Statistics show the pain motorists have been feeling for months, with headline inflation jumping by 1.1 per cent in the March quarter, largely due to surging oil prices.<\/p>\n
The Consumer Price Index rose 4.6 per cent in the 12 months to March 2026.<\/p>\n
This was largely due to surging fuel prices which were up 32.8 per cent over the month, prior to the government reducing the burden motorists feel at the petrol pump by reducing the fuel excise. <\/p>\n
The latest number is Australia\u2019s highest inflation since September 2023 when the nation\u2019s economy was rebounding after Covid-19.<\/p>\n
But Mr Halloway said Australia should look at the all important trimmed mean inflation rate, which still came in at 3.3 per cent, without the impact of an oil price jump. <\/p>\n
\u201cThat is still too high. And the fact that it held firm despite a significant external shock to household budgets tells you something about the persistence of the underlying problem,\u201d he said.<\/p>\n
Westpac chief economists Luci Ellis predicts inflation will peak at 5.4 per cent in the June quarter meaning there is more pain for households.<\/p>\n
\u201cWe now expect the RBA to hike in June and August as well as May,\u201d Ms Ellis said. <\/p>\n
\u201cThe longer Middle East conflict and early signs of strong second\u2011round pass\u2011through from fuel to other prices\u201d.<\/p>\n
Under the revised view, Ellis now expects 25 basis point hikes at the May, June and August policy meetings.<\/p>\n
Higher interest rates are expected to weigh on economic growth, particularly household spending, with Ms Ellis predicting job losses in Australia. <\/p>\n
\u201cWe expect unemployment to peak around 5 per cent, somewhat higher than the 4.7 per cent peak we flagged last week,\u201d she said.<\/p>\n
Ms Ellis said the cost of living pressures would remain until 2028, when inflation was expected to return to the RBA\u2019s two to three per cent target range.<\/p>\n
Meanwhile, Mr Halloway said Australia\u2019s problems extended beyond oil, with a desperate need to increase productivity. <\/p>\n
\u201cUntil we either lift productivity growth such that the economy gets a little breathing room, or, the more depressing outcome, squash demand back down again, this problem will keep re-emerging,\u201d he said. <\/p>\n","protected":false},"excerpt":{"rendered":"Australia\u2019s inflation rate has reached a three-year high due to surging oil prices flowing through the economy, with…\n","protected":false},"author":2,"featured_media":644589,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[64,63,99,164,115817],"class_list":["post-644588","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-au","tag-australia","tag-business","tag-economy","tag-newswire-business"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/644588","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=644588"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/644588\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/644589"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=644588"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=644588"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=644588"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}