Title: Middle East Crisis Risks Igniting Inflation. Here Are The Markets To Watch Out For In Australia
Let’s be blunt. Just when you thought it was safe to look at your grocery receipt without wincing, the world is serving up another helping of geopolitical indigestion. The escalating crisis in the Middle East isn’t just a tragic headline happening a world away; it’s a live wire snaking its way directly into the Australian economy, threatening to zap the modest progress we’ve made on inflation.
You’d be forgiven for thinking, “Not again.” We were just getting used to the idea that the interest rate nightmare might be nearing its end. The Reserve Bank of Australia (RBA) was looking at the data, we were all watching the numbers creep down, and a collective, cautious sigh of relief was almost audible.
Then the powder keg in the Middle East flared up, and suddenly, the global economic map looks a lot more dangerous. This isn’t just about distant conflicts. It’s about your wallet, your mortgage, and the price of filling up your car. So, let’s pull out a magnifying glass and look at which parts of the Australian economic landscape are most exposed to this fresh wave of instability.
Contents
The Ghost of Inflation Past is Knocking
To understand why a conflict thousands of kilometres away gives central bankers nightmares, you have to remember what kicked off this whole inflation mess in the first place. A huge part of it was energy. The war in Ukraine sent oil and gas prices into the stratosphere, which made everything more expensive to produce and transport.
Sound familiar?
The single biggest channel for this new crisis to hit Australia is through the price of oil. The Middle East is, to put it mildly, a rather significant player in the global oil market. When tensions rise, traders get jittery, and jittery traders start pricing in the risk of supply disruptions. That means the cost of a barrel of crude goes up.
And Australia, for all its mineral wealth, imports the vast majority of its liquid fuel. We are price-takers, not price-makers. When the global price of petrol rises, we pay more at the bowser. It’s that simple, and that painful.
This isn’t a trivial concern. A sustained spike in oil prices acts like a nasty tax on everyone. It makes transport more expensive, which pushes up the cost of every single item that gets put on a truck or a ship. It makes air travel more expensive. It directly feeds into the Consumer Price Index (CPI), the very number the RBA is obsessed with taming.
Just when the RBA thought it might be able to stop hiking rates, it could be handed a perfect excuse to keep them higher for longer. Or, at the very least, it slams the door shut on any talk of rate cuts in the near future.
The Choke Point in Global Trade
Beyond the direct cost of fuel, there’s another, more insidious threat brewing on the high seas. The recent attacks on shipping in the Red Sea have thrown a giant wrench into one of the world’s most critical trade arteries.
Think of the Suez Canal as the planet’s main digestive tract for consumer goods. A huge volume of trade between Asia and Europe passes through this narrow corridor. When it becomes too dangerous, shipping companies have to reroute their massive container ships all the way around the southern tip of Africa.
This isn’t a minor detour. It adds thousands of kilometres to the journey, burning significantly more expensive fuel and adding over a week to delivery times. Shipping companies, not exactly known for their charity, pass these extra costs straight through to their customers—the importers and retailers who stock our shelves.
So, get ready for a potential double-whammy: higher fuel prices making goods more expensive to produce, and higher shipping costs making them more expensive to import.
This is a textbook recipe for re-igniting goods inflation. Remember the supply chain snarls of the pandemic? This has the potential to be a smaller, but still very potent, version of that chaos. That “just in time” delivery model for everything from flat-screen TVs to garden furniture gets a lot less timely and a lot more costly.
The Australian Markets in the Crosshairs
Okay, so the global picture is worrying. But where does that leave us here in Australia? Which parts of our economy are sitting in the front row, nervously watching the flames?
The Supermarket Aisle
This is the most direct and personal impact for every Australian. The cost of your weekly shop is directly tied to the stability of global supply chains and energy prices.
Think about it. The truck that brings the groceries to the store runs on diesel. The refrigerated warehouse that stores them runs on electricity, the price of which is often linked to gas. The fertiliser used on farms is energy-intensive to produce. If you’re seeing a pattern here, you’re not wrong. Energy is the lifeblood of the modern food supply chain.
A protracted crisis in the Middle East threatens to push up the price of everything in the trolley. We’re not just talking about avocados. We’re talking about the staples. And for households already stretched to the limit, that’s a terrifying prospect.
The Petrol Station
This one is so obvious it almost hurts to mention it, but it bears repeating. Every dollar added to the price of a litre of unleaded is a dollar taken out of a family’s disposable income. That’s a dollar they can’t spend at a local café, on a new pair of school shoes, or on paying down their mortgage faster.
The psychological impact is also huge. The petrol station is the most visible and frequent inflation indicator for most people. When those numbers on the sign keep climbing, it feeds a narrative of a cost-of-living crisis that is completely out of control. This can dampen consumer confidence, which is the engine of the Australian economy.
Your Mortgage and the Share Market
Let’s talk about the elephant in the room: interest rates. The RBA’s entire game plan for the last two years has been to cool inflation by cooling the economy. They were, cautiously, hoping their job was mostly done.
A fresh inflationary shock from the Middle East completely upends that calculus. If this crisis pushes global energy prices up and keeps them there, it dramatically reduces the chance of an interest rate cut in 2024. The “higher for longer” mantra that everyone was hoping to retire might just get a new lease on life.
This is terrible news for anyone with a mortgage, who now faces the prospect of elevated repayment pain for many more months. It’s also a headwind for the property market, which had been tentatively adjusting to the peak-rate outlook.
On the share market, it’s a mixed bag, but mostly a worrying one. Airlines and any company with a massive logistics footprint (think retailers) will see their profit margins squeezed by higher fuel costs. Consumer discretionary stocks will suffer if households have to redirect even more of their income to essentials like food and petrol.
On the flip side, our local energy producers—the ASX-listed oil and gas companies—might see a short-term boost from higher commodity prices. But let’s be honest, that’s cold comfort for an economy facing a broader inflationary surge.
The Psychological Battle
We can’t ignore the role of inflation expectations. If businesses expect their costs to rise because of higher fuel and shipping, they will start pre-emptively raising their prices to protect their margins. If workers expect the cost of living to surge, they will demand higher wages to compensate.
This is what central bankers call a wage-price spiral, and it’s the scenario they fear most. Once that genie is out of the bottle, it’s incredibly difficult to put back in. The real danger of this Middle East crisis is that it shifts the entire psychology of the Australian economy from ‘inflation is falling’ back to ‘inflation is here to stay.’
Is There Any Silver Lining?
It feels a bit crass to look for a bright side in a geopolitical tragedy, but from a purely economic perspective, there are a couple of factors that might soften the blow.
First, the global economic outlook, particularly in China, is still fairly subdued. A weaker Chinese economy means less demand for oil, which can act as a counterweight to the supply fears emanating from the Middle East. It’s a perverse form of insurance.
Second, unlike the war in Ukraine, this crisis has not yet directly taken a major energy producer offline. The fear is about potential disruption, not an actual, physical shut-in of millions of barrels of oil. If diplomacy prevails and shipping lanes are secured, the price spike could be relatively short-lived.
But hoping for the best is not an economic strategy. Prudent businesses and households have to prepare for a rockier road ahead.
So, where does this leave us? Stuck between a rock and a hard place, frankly. The progress on inflation was real, but it was also fragile. The Middle East crisis is a stark reminder that our economic fate is often tied to events over which we have zero control.
The key takeaway is that the path back to low inflation and lower interest rates just got a lot more complicated and uncertain. The markets to watch are the ones you interact with every single day: the supermarket, the petrol station, and your mortgage statement.
Keep a close eye on the global oil price. Watch for announcements from major shipping companies about surcharges. And maybe, just maybe, temper those expectations for a quick rate cut from the RBA. The world, it seems, has other plans.
