Andrew Hauser, the Reserve Bank of Australia's deputy governor, has described the economic fallout from the Iran war as a 'central banker's nightmare', as soaring fuel prices and rising inflation weigh on household confidence. Speaking at an event in New York on Tuesday morning AEST, he said the bank was judging the balance between a 'big income shock' and a sharp rise in prices.
Stagflation occurs when inflation rises while economic growth weakens and unemployment climbs, presenting central bankers with a dilemma because measures to address one problem can exacerbate the other. The most extreme example was the 1970s oil shocks, when both unemployment and inflation reached double figures.
Hours after Hauser's remarks, Westpac's monthly survey showed consumer confidence had fallen by 13 per cent to 80 points, near the lows seen during the initial onset of Covid and the early 1990s recession. Senior economist Matthew Hassan said Australians were 'being hit by another cost of living shock' as expensive mortgages and higher pump prices put finances under intense pressure.
Hauser noted that Australia was the highest user of diesel per capita in the world, making the surge in fuel costs a significant real income shock. With unleaded petrol prices up 30-40 per cent in March and diesel up closer to 80 per cent, economists at the CBA predict inflation will jump by nearly 1 percentage point to 4.6 per cent in the year to March.
Financial markets priced in a 64 per cent chance of a third consecutive interest rate hike at the RBA's next board meeting on 5 May, but Hauser stressed the need to look beyond the initial impact on prices. 'It might still be on the upside, in which case we're going to have to respond,' he said. 'But we do also need to take account of the possibility that activity slows.'
A separate National Australia Bank survey of businesses showed corporate confidence had collapsed to its weakest in six years, marking the second largest fall in the survey's history, although business conditions remained steady. My Bui, an economist at AMP, said the two surveys pointed towards 'tough times ahead for both consumers and businesses', with the RBA likely to be concerned about inflation and inflation expectations.
