Markets 
Inflation is set to reach a three-year high as the war against Iran drives up prices on everyday goods, with warnings that the Australian economy could be in the grip of a stagflation slowdown that would drive more than 100,000 people out of work within months.
The Australian Bureau of Statistics on Wednesday will release the March consumer price index with analysts united in expecting a petrol-induced surge in prices that will take the overall inflation rate towards 5 per cent.
Petrol prices jumped by 37 per cent last month before the federal government’s cuts to fuel excise, and a ramp-up in petrol supplies across the country, started to push down prices, which are now about 6 cents a litre above their pre-war level.
The lift in petrol and diesel prices quickly fed into the broader transport system, which translated into higher costs on everything from construction materials to supermarket staples. Analysts believe inflation in March alone could rise by up to 1.5 per cent.
Not only is overall inflation expected to climb, but the closely watched measure of underlying inflation, which the Reserve Bank believes gives a better indication of overall price pressures in the economy, is also expected to surge.
Senior Westpac economist Pat Bustamante said inflation is on track to hit 5.4 per cent by the middle of the year, which would be the highest rate since mid-2023.
That increase in prices would be accompanied by a slowdown across the economy. Westpac is tipping growth to fall to just 1 per cent this year after it climbed to 2.6 per cent in 2025.
Not only would the economy be slowing as prices climbed, unemployment – currently 4.3 per cent – is forecast to increase to 5 per cent.
At 5 per cent, an extra 120,000 Australians would be looking for work during a period of slowing growth and increasing inflation – the traditional definition of stagflation. Australia has not experienced stagflation since the oil shocks of the 1970s.
While the economy would be struggling, Westpac estimates the war will deliver a revenue boost to Treasurer Jim Chalmers worth between $23 billion and $55 billion over the next four years due to higher-priced commodities, including gold.
“Higher-than-assumed commodity prices and elevated inflation will continue to lift nominal incomes and tax receipts,” he said.
“But the budget impact of the Middle East conflict does not stop there. In a shock like the current one, where economic and employment growth slow, unemployment ticks higher and inflation accelerates, welfare payments and the cost of government rise as well.”
The May 12 budget is expected to contain tax reforms, spending cuts and a suite of reforms aimed at boosting the speed at which the economy can grow without adding to inflation.
Changes to the capital gains tax and negative gearing are tipped in a bid to deal with what the government has termed “intergenerational equity”.
Pressed on Tuesday about the possible tax changes, Prime Minister Anthony Albanese said the budget would focus on building resilience across the economy.
“The theme of the budget will be resilience – resilience in how we make more things here in Australia, how we become less vulnerable to global shocks, whether that be COVID or whether that be international conflict, whether it be cyber-attacks [or] all of these issues,” he said.
“Resilience is about social cohesion and giving people that sense of ownership over the economy, making sure that the economy works for them, not people working for an economy.”
But Bustamante cautioned that any so-called broad “pro-cyclical” spending aimed at helping people deal with the inflation caused by the war against Iran could add to price pressures.
“Given the nature of the current oil price shock, a response that is not targeted and temporary risks exacerbating the cycle,” he said.
Separate data by the Commonwealth Bank confirmed how high-priced petrol is changing the spending patterns of Australians.
Derived from spending through its card network, the bank noted that expenditure through service stations remained historically high in the week to the end of April 18.
Ahead of the war, expenditure in petrol stations accounted for 1.8 per cent of total CBA customer spending. This jumped to 2.7 per cent in mid-March before easing to its current level of 2.3 per cent.
Spending on public transport has fallen sharply, due to free public transport in Victoria and Tasmania, while expenditure on travel has nosedived.
But expenditure in EV charging stations has almost doubled, although it remains a small proportion of overall spending.
Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.
Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via X or email.From our partners
Read the full article here
