‘Stagflationary shock’ from Iran war a ‘nightmare’ as confidence among Australian households crashes | Reserve Bank of Australia
Reserve Bank of Australia deputy governor Andrew Hauser said the “stagflation shock” caused by the Iran war was a “central bankers’ nightmare” as confidence among Australian households fell to its lowest level in decades.
Speaking at an event in New York at AEST on Tuesday morning, Hauser said the RBA was “considering the balance” between the damage to the economy from the “major income shock” associated with rising fuel prices and the sharp rise in inflation.
“This is the central bankers’ nightmare: Stagflation shock with rising inflation, [economic] activity has decreased – we are evaluating the balance between the two,” he said.
Rising consumer prices are often associated with a strengthening economy, but stagflation is when inflation rises as growth weakens and unemployment rises.
This leaves central bankers facing a dilemma, as interest rate moves to address one of two economic problems could worsen the other.
The most extreme version of stagflation occurred during the oil shocks of the 1970s; The unemployment rate and inflation have both reached double digits, but conditions are very different today.
Hauser’s comments came hours before Westpac’s monthly survey revealed that steep fuel costs and higher interest rates had triggered the sharpest fall in consumer confidence since the Covid pandemic.
Matthew Hassan, a senior economist at Westpac, said Australians were “facing another cost-of-living shock” as the double whammy of more expensive mortgages and higher pump prices “put finances under intense pressure again”.
The confidence index fell 13% to 80 points, returning to almost all-time lows experienced during the early onset of Covid and the recession of the early 1990s.
“A sharp deterioration in expectations suggests that consumers are preparing for a return to the prolonged period of weakness seen during the 2022-24 inflation challenge,” Hassan said.
The survey was conducted after the federal government announced a temporary 26-cent cut in the fuel tax.
Ahead of the Westpac report, Hauser noted that consumer confidence metrics had “fallen very, very sharply”.
“I don’t think these surveys tell you much about what consumption will do. But if they’re right, we’ve got a big income shock ahead of us.”
He noted that Australia is “the country that uses the most diesel per capita in the world.”
“So this is a big real income shock for Australia, even if national income and fiscal coffers benefit from this net export position.”
With unleaded gasoline prices rising by 30-40% in March and diesel prices approaching 80%, CBA economists predict that inflation will increase by about 1 point to 4.6% by March.
This would be almost double the RBA’s official 2.5% target.
Financial markets early Tuesday morning priced in a 64% chance of the RBA’s third consecutive interest rate hike at its next meeting on May 5, and Hauser said it was “easy to see that upward inflationary pressure”.
But the vice president said the fact that inflation was already “very high” had led to the Middle East conflict, adding that the central bank needed to look beyond the initial impact on prices and that “it is now more important for us to think about what that medium-term impact might be.”
“It may still be positive, in which case we will have to respond.” [with higher rates]he said.
“But we also need to take into account the possibility of activity slowing down.”
