You start one battle – and you break everything.
The immediate effects of the war, and the closure of the Strait of Hormuz, are evident in the Bureau of Statistics’ March. monthly inflation report.
Inflation rose to a three-year high of 4.6 percent. But if the price of oil – which had fallen in January and February – had only remained until March then the inflation rate would have fallen to 3.4 percent.
In March alone, instead of a 1.1 percent increase in inflation, overall prices would have been flat.
That is the price we all pay because of Donald Trump and Benjamin Netanyahu to enter Iran.
And this was just March. The impact of the large increase in oil prices has not yet affected prices in closely connected areas.
For example, the cost of domestic and foreign transportation fell by 1.5 percent and 0.2 percent, respectively. Anyone who has tried to get a flight into or out of Australia recently would know that’s all fiction.
Closer to home, the cost of milk rose by 0.6 percent last month. But that was before supermarkets raised their prices to cover increased transport and production costs and hit trucking companies and dairy farmers.
Cheese prices actually fell in March. That midnight cheese toastie isn’t going to get any better anytime soon.
That’s just the cost of fuel. Farmers in the northern hemisphere already face high fertilizer prices if, or when, they can get the product. Spring plantings of rice, wheat and corn will all struggle without an influx of fertilizer, meaning higher food prices later in the year.
Australian farmers are not far from facing similar issues.
On the outside, a sharp increase in headlines and core inflation, which remained steady at 3.3 per cent but should rise in the coming months, would mean the outcome of next week’s Reserve Bank meeting was locked in.
However, after the data, all financial markets lowered their expectations for a quarter percent increase on May 5.
There were several reasons for the conflicting market reaction.
The first is that inflation was not as bad as feared. Yes, it was a bad result, but the market expected worse.
The sharp increase in inflation occurred ahead of the Reserve Bank’s second rate hike of 2026 to the nation’s mortgage holders at the end of March. The February rate hike hasn’t started working its way through the economy.
That’s half a percent of the pain that’s just sitting around, ready to expose mortgage holders to war-induced hyperinflation.
Confidence between consumers and businesses is close to or even lower than what was measured during the COVID pandemic. No retailer thinks the shopper is afraid to open his wallet wide.
Every analyst also points to an increase in unemployment in the coming months. Westpac this week said it would reach around 5 per cent by the end of the year. That is an additional 120,000 people who are out of work.
Anyone who thinks Donald Trump is more likely to say sorry than the Reserve Bank holding its rates next week should go back to last month’s interest rate decision.
It was a 5-4 vote to take the cash rate to 4.1 percent.
A summary of the meeting noted that all nine attendees agreed that it was impossible to predict future rate movements “with any confidence given the high level of uncertainty regarding the scope and duration of the current Middle East conflict”.
“A longer crisis could have an impact on inflation and economic activity.”
The escalation of the meeting was announced on March 17. Donald Trump later assured the world that the war “would be over in two or three days”. Although the United States was not ready to leave the region yet, it would happen “in the very near future”.
That was over a month ago. The Strait of Hormuz is now under siege by Iran and the United States. Oil prices have returned to where they were, around $US110 a barrel, when Trump announced a two-week ceasefire.
No one is talking the end of the conflictand reopened through the narrow door, anytime soon.
The dispute continues. That means that the chances of “materials for inflation and economic activity” have increased, not decreased.
There is a reason some central banks are currently staying close to their interest rate settings. The uncertainty caused by Trump’s war is growing, not easing.
And that is a big problem for the Central Bank and the members of its monetary policy committee. And anyone who happens to have a mortgage, drives a car, runs a business, wants a vacation or enjoys cheese toasties.
Cut through the noise of federal politics with news, opinion and expert analysis. Subscribers can subscribe to our weekly Domestic Politics newsletter.
Shane Wright is senior economics writer for The Age and The Sydney Morning Herald.Connect through X or email address.
