Australians face rising petrol prices and interest rates as Middle East conflict worsens inflation

Australians face higher petrol prices and even more interest rates rises as the US-led war on Iran worsens an already bad inflation situation.

Motorists in Australia’s big cities were already paying more than $2 a litre for unleaded petrol with those prices yet to even reflect the double-digit increase in crude oil prices that occurred on Sunday night and Monday morning, following the death of Iran’s Ayatollah Ali Khamenei.

But those relying on their car could soon by paying $2.40 a litre, conservatively adding $22 to a weekly fill, should an escalation in the conflict disrupt the Strait of Hormuz, where a fifth of the world’s oil is transported.

A sustained regional conflict in the Middle East and the Gulf States is forecast to push up crude oil prices, which could force the Reserve Bank of Australia to put up interest rates like they did in 2022, following Russia’s invasion of Ukraine.

A sustained increase in petrol prices could make inflation even worse, University of New South Wales economics professor Gigi Foster told The Nightly.

“Certainly, now with extra costs, because of these Arab states getting embroiled in conflict, I would expect there would be some degree of inflation, particularly because this is energy we’re talking about,” she said. “Energy flows into everything.”

Former Treasury economist Warren Hogan said the Reserve Bank of Australia may be forced to add on an extra interest rate rise, than would otherwise have been the case, should crude oil prices rise and stay at $US100 a barrel ($141) until the end of 2026.

Under this scenario, the RBA cash rate would hit 4.6 per cent for the first time since November 2011, undoing the effects of the three cuts in 2025.

“We’ve got inflation in the system already so it’s going to make them nervous,” the EQ Economics managing director told The Nightly.

“If the economy doesn’t get hurt by the uncertainty, it could be a reason that the cash rate needs to go back to where it was or even a bit higher.”

Benchmark Brent crude oil futures jumped as much as 12 per cent in early trade to $US81.89 a barrel, before moderating to $US79.45 on Monday morning.

The West Texas Intermediate price of crude oil had jumped 10 per cent to an eight-month high of $US75 a barrel.

A drawn out regional conflict could see a $US40 spike in oil prices which AMP chief economist Shane Oliver said would translate into a 40-cent-a-litre rise in petrol prices that would add 0.8 per cent to the consumer price index.

Motorists in Sydney and Brisbane were typically paying $2 a litre for unleaded petrol on Monday morning, before crude oil prices had been factored into pricing.

Should average prices rise to $2.40, the bill for filling up a Toyota RAV4 SUV would rise from $110 to $132.

This could occur if crude oil prices rose above $US100 a barrel.

This would be at levels last week seen in early 2022 after Russia’s invasion of Ukraine sparked sanctions and forced up Australian inflation.

“Higher oil prices will add to inflation resulting in higher than otherwise interest rates,” Dr Oliver said.

“Central banks will focus on underlying inflation and higher oil prices threaten economic growth.”

A sustained conflict involving US troops on the ground could see crude oil prices spike to $US150 a barrel, he added.

Economists at Australia’s Big Four banks are already expecting a May interest rate rise, following on from last month’s 25 basis point increase that took the Reserve Bank of Australia cash rate to 3.85 per cent.

That was before US air strikes, based on Israeli intelligence, led to the death of Iran’s Ayatollah in Tehran on Sunday.

Australia’s 3.8 per cent inflation rate in January was already well above the RBA’s 2-3 per cent target.

Even without a war in the Middle East, the RBA was not expecting it to fall back within that band until mid-2027.

Russia’s Ukraine invasion four years ago had caused inflation to soar from an already high 3.5 per cent in late 2021, after COVID lockdowns, to 5.1 per cent by March 2022, which at the time was the highest since late 1990, during the first Gulf War.

By the end of 2022, inflation at reached a 32-year high of 7.8 per cent, sparking 13 rate rises in 2022 and 2023.