Fears of a return to the crippling 1970s-era stagflation are mounting among Australia’s leading economic experts, as skyrocketing oil prices driven by Middle East tensions push inflation to multi-year highs and threaten to push unemployment sharply upward. The core risk stems from ongoing disruptions to global energy supplies, centered on potential extended disruptions to the Strait of Hormuz, the strategic chokepoint through which roughly 20% of the world’s daily oil shipments pass.
In a stark analysis published in an investment note, Bob Cunneen, senior economist at MLC, warned that the ongoing conflict in Iran has created a dangerous dual threat of simultaneously rising inflation and rising unemployment — the toxic combination that defines stagflation. “The global economy currently confronts the prospect of both rising inflation and unemployment because of this Iran war,” Cunneen explained. “This stagflation mix of both higher inflation and unemployment creates a major policy dilemma for central banks, which are forced to choose between taming sky-high prices and preventing further job losses.”
Stagflation is widely regarded as one of the worst possible scenarios for any modern economy, as it combines stagnant consumer spending and slowing growth with persistent accelerating inflation — a combination that leaves policymakers with few effective tools to address both crises at once. Australia last experienced a full stagflationary crisis in the mid-1970s, which was also triggered by a major global oil price shock.
Before the escalation of Middle East tensions, global benchmark oil traded at roughly $US56 per barrel. In the weeks following the outbreak of conflict, prices spiked as high as $US120 per barrel, marking a 97% jump in crude prices in US dollar terms for the year to date. For Australian motorists, this translates to an extra 10 cents per litre at the fuel pump for every $10 per barrel rise in crude costs. While the Australian government has partially offset this pain by cutting fuel excise in half and returning GST windfall gains to consumers, the broader inflationary shock has already flowed through the entire national economy.
Cunneen’s warning echoes a growing consensus among leading economic analysts. HSBC chief economist Paul Bloxham has projected that Australia will enter a stagflationary period for two of the next three quarters. “As we see it, a stagflationary shock has arrived,” Bloxham wrote in a note to clients. When asked whether this would mirror the extreme stagflation of the 1970s, Bloxham noted that the outcome depends heavily on the persistence of the energy shock and the policy choices made by Australian regulators. He added that outright stagflation is a growing risk, and policymakers should prioritize keeping the episode as short as possible through optimal policy settings.
Bloxham pointed out that Australia entered this crisis already vulnerable, with inflation running above the Reserve Bank of Australia’s (RBA) target range at 3.7% even before the Middle East conflict escalated. “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 explained.
AMP chief economist Shane Oliver echoed that assessment, confirming that Australia is already experiencing a mild stagflationary environment, far less severe than the 1970s crisis but still damaging for households. “At this stage we are only expecting a mild form of stagflation with only slightly higher unemployment,” Oliver said. He did, however, warn that the risks grow sharply if the Strait of Hormuz remains disrupted for an extended period: prolonged closure could push oil prices even higher, trigger fuel supply restrictions, and lead to a full recession with a significant jump in unemployment. If that scenario plays out, Oliver added, it would also create major headwinds for Australia’s already fragile property market.
Official data released Wednesday by the Australian Bureau of Statistics (ABS) confirms the severity of Australia’s inflation challenge. Headline inflation rose 1.1% in the March quarter, driven overwhelmingly by surging fuel prices, pushing annual inflation to 4.6% — the highest reading recorded since September 2023, when the Australian economy was still rebounding from post-Covid-19 disruptions. Even before the government cut fuel excise, national fuel prices rose 32.8% in the month leading up to the ABS survey.
Morningstar market strategist Lochlan Halloway noted that Australia’s inflation problem is not just driven by global energy shocks — it is also deeply entrenched in the domestic economy. Even when stripping out the impact of the oil price jump, Australia’s trimmed mean core inflation rate still came in at 3.3%, well above the RBA’s target range. “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,” Halloway said. He added that beyond energy prices, Australia urgently needs to boost lagging productivity growth to ease pressure on the economy: “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.”
Westpac chief economist Luci Ellis has projected that inflation will peak at 5.4% in the June quarter, bringing even more cost-of-living pain for Australian households. In response to persistent inflation, she now expects the RBA to implement three consecutive 25-basis-point interest rate hikes at its May, June, and August policy meetings, up from earlier projections of a single hike. These higher rates are expected to slow economic growth, particularly household spending, and lead to net job losses across the country. Ellis now projects that Australia’s unemployment rate will peak around 5%, up from her earlier forecast of 4.7%, and warned that cost-of-living pressures will remain persistent until 2028, when inflation is finally expected to return to the RBA’s 2-3% target range.
