Reserve Bank of Australia deputy governor Andrew Hauser warns of inflation shock similar to 1970s

The Reserve Bank’s deputy governor Andrew Hauser has warned Australia faces becoming poorer as it suffers a 1970s-style inflation shock stemming from the Middle East oil crisis that will see interest rates lifted.

And he declared the RBA needed to do a better job of managing expectations as rate rises aimed to stabilise inflation, and admitted most central banks didn’t properly understand the effects of an oil shock.

Mr Hauser also called on the the Government to back the RBA’s unpopular rate decisions.

More expensive fuel is expected to put up prices but without a reduction in consumer spending, inflation could stay at elevated levels, as central banks grapple to understand the dual dangers of soaring prices and potentially much higher unemployment.

“You do need to bear in mind it can get built into inflation expectations which happened in the ‘70s, we can’t go back there,” he told an audience in Washington DC on Thursday morning.

“Supply shocks are a hard sell to the public: inflation is inevitably higher, activity’s going to be lower, we’re going to be poorer, there’s not much upside news in that story.

“The adverse supply shock is a central banker’s nightmare because it pushes inflation up, it pushes activity down, it causes you real challenges in managing that.”

Mr Hauser’s warning about the prospect of stagflation - or simultaneously high inflation and unemployment - was made before new data showed the jobless level in March holding steady at 4.3 per cent, during the first full month of the Iran war.

With the labour force still tight, the RBA is expected to focus on tackling high inflation at the expense of jobs as higher crude oil prices make consumer goods more expensive.

“In Australia, we went into the Iran shock already running quite hot and that created some challenges,” Mr Hauser said.

The RBA deputy suggested Treasurer Jim Chalmers needed to back the independent Reserve Bank’s hikes, even if they were politically unpopular with home borrowers.

“You need rock-solid support from governments, at a time when you’re making hard decisions,” he said.

“It’s actually quite a tough risk in terms of setting monetary policy.”

“You need to be very clear what you can’t do because people are maybe thinking monetary policy can solve everything.

“We need to work out how to analyse these shocks, that’s not easy as it first seems.

“Now we’re having to become energy experts, understanding the nature of the shock is not something that necessarily we as central bankers are expert at.

“Our models are much better at describing demand than supply and identifying the difference between supply and demand shocks can be difficult.”

Australia’s inflation pace of 3.7 per cent in February before the Iran war was already well above the RBA’s 2-3 per cent target, and economists are expecting it to soar past 5 per cent by mid-year for the first time since 2023.

In 1973, inflation climbed from an already elevated 9.9 per cent level in the September quarter - before the Yom Kippur war of October - to 12.5 per cent by the end of the year.

By the March quarter of 1975, it reached a 23-year high of 17.7 per cent, and saw Labor prime minister Gough Whitlam dismissed eight months later.

Unemployment also doubled, from a low 2.1 per cent in late 1973 to 5.4 per cent by late 1975.

The Arab-Israeli war saw oil producing nations in the Middle East cut production, leading to crude oil prices quadrupling from $US2.90 a barrel to $US11.65 by early 1974, US Federal Reserve historical data showed.

Australia also had double-digit inflation again in 1979, after the first Ayatollah came to power in Iran, with a theocratic regime replacing a secular Shah.

Unemployment and inflation were both at double digits at the same time by 1983.

Crude oil prices in 2026 have doubled from $US63 a barrel before the US strikes on Iran in late February to all-time highs of $US100 a barrel this month.

The RBA is broadly expected to lift rates again on May 5, which would mark the third increase in 2026 and undo all the relief from 2025.

The futures market sees two more hikes in 2026 that would take the cash rate to a 15-year high of 4.6 per cent.