Oil shocks, Inflation & Global Ructions

The war in the Middle East and the associated oil shock is dominating economic discussions, policy and the outlook for the economy.

Oil prices have risen sharply and the distribution of oil has been significantly dislocated leading to concerns about the supply of petrol in Australia and New Zealand in the weeks and months ahead.

The price effects are obvious. Petrol prices (including diesel) are generally up 40 to 60 per cent which is impacting inflation, consumer and business confidence and household spending.

The purchasing managers index for services in Australia, for example, fell to 46.6 points in March, signalling a material slowing in the services sector. This is a contractionary reading. It should be noted that this fall largely pre-dates the full impact of the most recent interest rate rise and the oil price shock. 

What is also significant is the availability of petrol, particularly in some rural and regional areas. This has been driven by what might be termed ‘panic buying’ which has drained retail inventories. The mining, transport and agriculture sectors, which are the main users of diesel, have experienced shortages in regional areas. If this continues, it will depress economic activity in those sectors.

At this stage, the supply of petrol into Australia remains little changed and arrivals are orderly. According to Malcolm Roberts, Chief Executive of the Australian Institute of Petroleum, tanker deliveries are continuing with minimal disruption, and forward contracts are still being honoured. For now, at least, the augers well for the restocking of supplies for the retailers impacted by the panic buying.

To help explain why the supply concerns are likely to be an exaggeration of the true supply of petrol n Australia, retailers were understandably caught unawares by the surge in demand as the oil shock hit global markets. This means that ‘usual deliveries’ will catch up and remain flowing as the panic buying subsides.

The disruption to petrol supply is, for now, temporary.

As is often the case with such economic upheavals, things can change quickly. In the fickleness of the military action in Iran and the Middle East, crude oil supplies to the refineries in the Asian region could be materially cut at any moment. There could also be some form of a resolution which sees oil prices fall and supply chains repaired.

With this background, after a solid economic recovery in 2025, there are signs of a slowing in economic activity in Australia which is coinciding with rising inflation.

Australia

Since the start of 2026, household spending growth has stalled, new dwelling building approvals have weakened, consumer sentiment has fallen sharply, while business confidence has turned negative for the first time in a year. There remains positive news with capital expenditure, but the outlook is for annual economic growth to moderate to around 1.25 per cent by year end from 2.6 per cent in 2025.

The annual trimmed mean inflation rate was 3.4 per cent in January with headline inflation at 3.8 per cent. This is before the oil price shock impacts inflation. Both the RBA and Treasury are forecasting inflation to approach 4.75 per cent as the petrol price hikes are captured in future data.

In the mean time, the unemployment rate ticked back up to 4.3 per cent in February with further increases likely as the oil price shock and interest rate hikes impact spending, which will see demand for labour stall.

The RBA has so far taken a hawkish view of the inflation outlook, hiking for a second time in two months in March on the basis that inflation would be materially higher than its target. Money markets are pricing in a further three interest rate hikes by the end of 2026, which if realised, would see the cash rate reach a 15 year high of 4.80 per cent.

New Zealand

There remain tentative signs of a recovery from the 2024 / 2025 recession. GDP rose 0.2 per cent in the December quarter after rising 0.9 per cent in the September quarter. That said, growth is little changed in annual terms. As a result, the unemployment rate rose to 5.4 per cent in the December quarter to reach a nine year high. The unemployment rate was 3.2 per cent at the low point of the cycle in the December quarter 2021.

Inflation remains above the RBNZ target and, like the rest of the world, will spike higher once the petrol price surge is factored in. The latest data showed annual inflation at 3.1 per cent, up from the low of 2.2 per cent at the end of 2024.

Amid these mixed signals, the RBNZ remains confident of a modest economic recovery through 2026 but that inflation will only gradually return to target. As a result, financial markets are pricing in an interest rate hiking cycle, starting around the middle of 2026.

From the current 2.25 per cent cash rate, markets are pricing in a cash rate of 3.5 to 3.75 per cent during 2027. Recent comments from RBNZ officials suggests rates could be hiked earlier and more aggressively if the inflation effects from the oil shock are embedded in the New Zealand economy.