Australia’s 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 “stagflation” problem.
In a grim investment note, MLC senior economist Bob Cunneen says the effective shutdown of the Strait of Hormuz – a key waterway where 20 per cent of the world’s oil passed through – could drag Australia back to a 1970s stagflationary period.
“The global economy currently confronts the prospect of both rising inflation and unemployment because of this Iran war,” he said.
“This stagflation mix of both higher inflation and unemployment creates a major policy dilemma for central banks.”
Stagflation is the worst possible outcome for an economy as inflation continues to rise even as spending drops.
It last occurred in Australia in the mid 1970s due to another oil price shock.
Before the Middle East conflict, oil prices were about $US56 ($A80) per barrel, before temporarily touching $US120 (A$167) per barrel.
For every $10 increase in the price of oil, Australians pay an extra 10 cents at the fuel pump.
Mr Cunneen points out oil prices have already surged 97 per cent in US dollar terms this year, creating problems for motorists – although this has partially been offset by the government’s decision to halve the fuel excise and give back the GST windfall.
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.
Mr Cunnan’s 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.
“As we see it, a stagflationary shock has arrived,” he wrote in a note to clients.
“Could it be genuine stagflation – like the 1970s? This depends on how persistent it is. And, importantly, on what policymakers do next.”
Mr Bloxham stopped short of calling this a repeat of the 1970s, but said risks were rising for policy makers.
“Australia 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,” Mr Bloxham said.
Australia’s Cash Rate 2022
He said inflation was already running above target – which was at 3.7 per cent prior to the Middle East war – meaning Australia was not well placed to deal with any negative shocks.
“Because Australia’s 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,” he said.
Meanwhile, AMP’s chief economist Shane Oliver believes Australia is currently in a stagflationary environment, albeit not as extreme as five decades ago.
“At this stage we are only expecting a mild form of stagflation with only slightly higher unemployment,” he said.
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.
“If this occurred it would likely act as a big drag on the property market,” he said.
Australia’s entrenched inflation problem
Morningstar market strategist Lochlan Halloway warns Australia has an inflation problem that is home grown and worse than the market is anticipating.
Wednesday’s 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.
The Consumer Price Index rose 4.6 per cent in the 12 months to March 2026.
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.
NED-6209-Wage-growth-vs-inflation
The latest number is Australia’s highest inflation since September 2023 when the nation’s economy was rebounding after Covid-19.
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.
“That 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,” he said.
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.
“We now expect the RBA to hike in June and August as well as May,” Ms Ellis said.
“The longer Middle East conflict and early signs of strong second‑round pass‑through from fuel to other prices”.
Under the revised view, Ellis now expects 25 basis point hikes at the May, June and August policy meetings.
Higher interest rates are expected to weigh on economic growth, particularly household spending, with Ms Ellis predicting job losses in Australia.
“We expect unemployment to peak around 5 per cent, somewhat higher than the 4.7 per cent peak we flagged last week,” she said.
Ms Ellis said the cost of living pressures would remain until 2028, when inflation was expected to return to the RBA’s two to three per cent target range.
Meanwhile, Mr Halloway said Australia’s problems extended beyond oil, with a desperate need to increase productivity.
“Until 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,” he said.