Latest Treasury forecasts show inflation could pass 7% in Australia if oil prices double due to the ongoing conflict across the Middle East.
New modelling on Australia’s predicted inflation path was published on Tuesday in the federal budget papers, which outlined the government’s spending and taxation plans for the next year.
Treasurer Jim Chalmers arrives at Parliament House ahead of handing down the budget in Canberra. Picture: Hilary Wardhaugh
Housing and first-home buyers emerged as winners after suspected major cuts to negative gearing and capital gains tax discount benefits for property investors were confirmed.
Treasurer Jim Chalmers handed down the ambitious budget amid ongoing concerns over the influence of government spending on inflation, which reached a near three-year high during March.
Despite this, leading economists say price growth is expected to trend down this year as high interest rates slow the economy, adding to pressure on households and leaving policy restrictive enough to eventually support rate cuts.
While Dr Chalmers has insisted costs from the war in Iran render government spending inconsequential to existing inflation, Treasury estimates paint a bleak picture of when Australians can expect cost of living pressures to ease.
Ships have been blocked from moving through the Strait of Hormuz. Picture: Getty
Oil prices play a major role in Australia’s cost-of-living pressures, with price changes rippling through almost every part of the economy. While Australia produces some oil, it is heavily reliant on import and global prices, meaning everyday costs go up when the price of oil rises.
Before United States-Israel coordinated attacks in Iran began at the end of February, a barrel of crude oil traded around USD$70 a barrel. Prices rose significantly following the outbreak of war and have sat above $100 per barrel for much of the past 12 weeks.
Inflation is expected to peak in Australia next month off the back of this, with the Reserve Bank forecasting a high of 5%.
Worst-case scenario modelling of $200-per-barrel costs are now being considered by the government with no end to the war in sight.
“We would still avoid a recession, but unemployment would spike to pre-pandemic levels and inflation would peak above 7%,” Dr Chalmers said in his budget address.
Existing household pressure from mortgages, rents and living expenses would be exacerbated by the jump, though a long stretch with interest rates above 4% might not be the RBA’s chosen path.
Following the budget, Australia’s largest lender Commonwealth Bank warned a peak of 7.25% would mean inflation takes two quarters longer than the Reserve Bank has forecast to return to its 2-3% target range.
“This scenario shows a more severe conflict will have a significant impact on both households and businesses. For households, real incomes fall in the face of rising prices, exacerbating cost of living challenges,” the bank stated.
“This places pressure on household budgets at a time when workers may also be facing weaker job prospects as the labour market deteriorates due to slowing economic activity.”
Despite this, AMP economists expect the RBA to only hike rates once more, with cuts to come as soon as next year.
The central bank has opted for milder scenario analysis than the government, revealing after last week’s rate cut that its forecasts that largely assume an imminent end to the Iran War, in line with oil price estimations.
Governor Michele Bullock has called on both the government and households to limit spending. Picture: David Gray
AMP economists still expect borrowers to be hit with another rate hike in August, stating the budget “does nothing to make the RBA’s job in controlling inflation easier”.
Without strong stimulus to add to economic growth and consumer confidence continuing to slide, AMP said it “remains of the view that the RBA will be cutting rates next year”.
CBA has also said rate cuts “are on the table in 2027”.
“Employment growth is forecast to slow, primarily in 2027, as the lagged impact of the economic slowdown flows through to the labour market. By Q2 2028, employment growth is forecast to be weak at just 0.9%, reinforcing our point above that these forecasts open the door to monetary policy easing in 2027,” head of Australian economics Belinda Allen said.
CBA head of Australian economics Belinda Allen says rate cuts are in the picture for 2027. Picture: Supplied
“Wages growth is expected to be modestly higher over the forecast horizon, reflecting pressure from higher actual and expected inflation.”
Even with rate cuts on the far horizon, households could be feeling the punch for months to come, with Australia expected to take longer than most other countries to fully recover from the global oil crisis once war in the Middle East ends.
A combination of physical distance from major refineries, geographic isolation and relatively small population puts Australia at the end of the production chain for refined oil products.
Australia's geographic position puts it at the end of the line for recieving refined oil products. Picture: Getty
Dr Chalmers said the combination of GDP, wage and employment growth still positions Australia well to meet the challenges of high inflation, but acknowledged major gaps the Labor Party hopes the budget can solve.
“Our economy is being reshaped by structural shifts across energy, industry, technology, demography and geopolitics,” he said.
“War in the Middle East has been pushing up prices, pushing down growth, and punishing Australians. It has exposed weaknesses in the global economy and intensified longstanding challenges here at home.
“But how we respond is up to us.”
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