Imported inflation threat grows as Middle East conflict pressures Australian economy

Australia’s inflation fight may be entering a more complicated phase, with economists warning the conflict in the Middle East risks feeding imported cost pressures deeper into the domestic economy.

While the latest inflation figures showed a sharp rise in headline inflation, one leading academic says the bigger issue for households, businesses and the Reserve Bank is whether higher global energy and transport costs begin flowing more broadly through to everyday prices across the Australian economy.

Speaking with API Magazine, Dr Ben Zhe Wang, Associate Professor, Department of Economics, Macquarie University, said there were growing signs many Australian businesses were preparing to pass on at least part of their rising costs to consumers if geopolitical tensions remained elevated.

Annual inflation rose from 3.7 per cent in February to 4.6 per cent in March, driven largely by higher transport and fuel costs following disruptions to global energy markets linked to the Persian Gulf conflict.

However, the Reserve Bank’s preferred measure of underlying inflation, trimmed mean inflation, remained steady at 3.3 per cent, suggesting broader price pressures across the economy have not yet accelerated significantly.

That distinction may prove critical in determining whether Australia experiences only a temporary inflation shock or a more sustained second wave of price increases that would incite rate rises.

Dr Wang said the concern was no longer simply what households were paying at the petrol bowser, but whether businesses across the economy began embedding higher energy and operating costs into their pricing structures.

“Global energy shocks of this scale and duration affect almost every business in Australia, from tradies and cafés to miners and manufacturers,” Dr Wang said.

“The real question is how much of that cost increase will eventually navigate its way into the prices Australian businesses charge.”

Research raises inflation questions

New research from Macquarie University’s April Business Outlook Scenarios Survey provides an early indication of how businesses are thinking about that question.

The survey, which canvassed around 700 Australian businesses, asked respondents how they would react to a hypothetical 10 per cent increase in costs linked to the Middle East conflict.

Approximately 80 per cent said they expected to pass at least some of those higher costs on to customers within three months. However, the scale of those increases was relatively modest, with businesses indicating they would pass through roughly 17 per cent of the additional costs immediately, rising to around 30 per cent over a year.

At face value, the findings suggest many businesses are still attempting to absorb a significant portion of rising costs rather than fully transferring them to consumers.

But Dr Wang cautioned that competitive pressure may be temporarily suppressing price increases rather than eliminating them altogether.

“When businesses were asked what limited their ability to raise prices, the most common answer was competitive pressure,” he said.

“In other words, restraint may not reflect a lack of desire to raise prices. It may reflect a desire not to be the first mover.”

That dynamic creates what economists describe as a coordination problem across the broader economy.

If most businesses hold off raising prices because competitors are doing the same, inflationary pressures can remain relatively contained for a period. However, once enough firms begin adjusting prices, broader pass-through can accelerate quickly.

“What looks like limited pass-through today can become broader price adjustment tomorrow,” Dr Wang said.

“And the longer the conflict drags on, the more likely businesses are to pass on their cost increases.”

Inflation is largely domestic – for now

The issue has become increasingly relevant for the Reserve Bank of Australia (RBA) as it attempts to balance slowing domestic demand against the risk of imported inflation becoming more entrenched.

The RBA has already adopted a more hawkish tone in recent months, lifting the cash rate three consecutive times in response to stubborn inflation pressures and resilient economic activity.

Higher interest rates are designed to reduce spending and ease inflation by slowing demand across the economy. However, monetary policy typically operates with a lag, meaning the full impact of recent rate rises may not become apparent for several months.

That timing mismatch is creating uncertainty around how effectively the Reserve Bank can contain inflation if global energy costs continue rising.

“The key question is which force moves faster,” Dr Wang said.

“Whether the impact of monetary policy gets ahead of business cost pass-through.”

If higher interest rates slow spending quickly enough, economists believe the current energy shock could remain relatively temporary and concentrated in fuel and transport-related sectors.

However, if businesses begin lifting prices more broadly before demand weakens materially, Australia’s inflation problem could evolve into something far more persistent.

“Australia’s inflation problem is still largely domestic at its core,” Dr Wang said.

“But if businesses begin passing higher energy and input costs through more broadly, core inflation will start rising.”

Property market implications

For property markets and investors, the implications are significant.

Persistent inflation would increase the likelihood of higher-for-longer interest rates, potentially placing further pressure on borrowing capacity, mortgage serviceability and housing demand at a time when affordability is already stretched.

At the same time, construction, logistics and development sectors remain particularly exposed to elevated fuel and transport costs, creating additional pressure on project feasibilities and operating margins.

While underlying inflation remains below the recent headline spike for now, economists say the coming months may determine whether Australia experiences a short-term energy shock or a more deeply embedded inflation problem.

As Dr Wang summarised: “The risk is that Australia’s inflation becomes locally entrenched, even if the original shock came from overseas.”