War-driven inflation surge raises Australia’s recession risk, starting with rising food prices
Bread prices are set to soar. Here’s why Australia’s food supply is vulnerable as war drives up the cost of a key fertiliser used to make diesel additive.
Soaring inflation starting with more expensive food has the serious potential to cause a recession in Australia and revive the nightmares of the 1970s oil crises, economists say.
Australia’s food supply is vulnerable to the blockade of the Strait of Hormuz, given it imports 90 per cent of urea, a high-nitrogen fertiliser that is also used to make AdBlue for diesel engines such as tractors and trucks.
More expensive fertiliser is set to compromise the planting of wheat, a nitrogen-intensive crop, during autumn for a spring harvest and push up food prices, particularly for staple items like bread and pasta made from wheat.
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By continuing you agree to our Terms and Privacy Policy.“Australia is also exposed to this fertiliser shock and is the first to experience the impact, as wheat planting has commenced,” ANZ commodity strategists Soni Kumari and Daniel Hynes said in a note to clients.
“The energy shock driven by regional conflict is escalating into a global threat to food production, with impacts starting to show during planting season and setting expectations of tighter harvest and higher food prices.”
Fertiliser comprises a third of the production cost of a crop like corn while fuel contributes another 10 per cent of the total wholesale cost.
A 30-40 per cent rise in fertiliser and energy prices could lead to 7–8 per cent increase in the cost of producing key crops, ANZ estimated.
Weakened profitability, as a result of higher fertiliser and diesel costs, would see farmers plant less of corn and wheat, ultimately hurting consumers.
“Rising diesel cost will impact fuel cost, increasing the expense of everything from planting and irrigation to harvesting and distribution,” ANZ said.
Food prices affect 14 per cent of the consumer price index, making it among the biggest contributors to overall headline inflation along with housing.
To cope with soaring prices, Australians would start by eating cheaper food and cutting back on restaurant meals before reducing other expenses to deal with the worst oil shock since the 1970s, economist Nicki Hutley told The Nightly.
But if they kept on cutting back on their spending to cope with higher food costs and Reserve Bank interest rates, Ms Hutley said recession risk was “about 20 per cent at this point in time” even if US President Donald Trump ended the Iran war.
“That’s on the assumption that Trump actually could pull us out of this war and things resumed as normal within a couple of months and that’s a big, big if,” she said.
“We certainly know that it is a massive, massive shock and the longer it goes on, the worse it gets for everybody.
“There is absolutely a flow-on effect to the economy — there is no doubt about that. The question is, ‘How big is it?’”
Higher food prices would hurt supermarket profitability, necessary for employment growth, because consumers are more likely to cut back on spending, Morgan Stanley equity analysts said.
“Food inflation helps supermarket profitability only when supported with volume growth,” they said.
“Consumers remain highly value-focused, with rate hikes and fuel inflation weighing on already stretched household budgets.
“This is likely to weigh on gross profit margins because “supermarkets may be more cautious around price pass through onto the consumer”.
Operating cost inflation is also expected to rise, via higher freight and wage charges, “which are also often moving in tandem with food inflation”.
The oil shocks of the 1970s caused Australia’s economy to shrink even as inflation soared to double-digit figures.
The Yom Kippur War of 1973 caused a recession by late 1975, after inflation has climbed to 23-year high of 17.7 per cent that hadn’t been experienced since the Korean War-led wool boom of 1952.
The Iran-led oil shock of 1979 led to Australia’s economy shrinking in that year’s June quarter, without sparking a technical recession, but inflation climbed to 11 per cent the following year.
The Reserve Bank of Australia and Treasury are both modelling inflation soaring from 3.7 per cent in February, before the US strikes on Iran, to 5 per cent in 2026 for the first time in three years.
The futures market is bracing for two more hikes this year, taking the cash rate to a 15-year high of 4.6 per cent, given inflation is well above the RBA’s 2-3 per cent target.
