CBA ups inflation prediction as supply chains strain

As markets try to parse conflicting statements from the US and Iran about ceasefire talks, CBA head of Australian economics Belinda Allen and her team were unconvinced by the rhetoric coming out of the White House.

"In our central case, this conflict still has some time to run, and the Strait of Hormuz is unlikely to re-open quickly despite ongoing reports of US-Iran talks," they said in a research note on Friday.

CBA's base case is predicated on the benchmark oil price - currently about $US105 a barrel - sitting at $US120 a barrel for about three months.

Treasury also modelled a scenario in which oil prices hit $US120, but forecast inflation to rise as high as five per cent.

The Australian Bureau of Statistics reported on Wednesday that inflation eased to 3.7 per cent in the year to February, although the data pre-dated the start of the Middle East conflict.

The inflation spike is expected to be smaller than when the Russia-Ukraine war combined with the post-COVID-19 pandemic economic bounce and inflation peaked at 7.8 per cent, CBA said.

"However, risks are tilted to the upside, particularly given the recent escalation in the conflict and the possibility that it persists for longer than currently priced by markets," the bank said.

The difference this time is the impact on energy markets is expected to have a greater impact on slowing economic activity.

CBA's growth forecast for 2026 was slashed from 1.9 per cent to 1.6 per cent, while unemployment was expected to drift up from 4.3 per cent to 4.6 per cent by early 2027.

Westpac chief economist Luci Ellis said it would be a mistake to treat the current crisis the same as COVID-19.

"The current conflict bears little resemblance to the COVID pandemic, so policy responses should differ," she said. 

"We were surprised that work-from-home mandates have been seriously proposed."

Australia's fuel supply disruption is being caused by consumer stockpiling, not a reduction in supply.

The government should instead make more effort to publicise the restocking of petrol stations that have run out, and measures to free up supply, such as changes to fuel standards and the oil-for-gas deal with Singapore, Dr Ellis said.

In a positive development for Australia's oil supplies, several tankers operated by countries not involved in the conflict have been afforded safe passage through the Strait of Hormuz in recent days, Westpac economists Elliot Clarke and Ryan Wells noted.

"If Iranian authorities hold to this guidance, China's fleet and vessels from other non-aligned countries such as Malaysia (a key supplier to Australia who reportedly reached an agreement with Iran overnight) could slowly reduce the current global deficiency in crude and LNG supply, even if the US/Israel and Iran continue military actions against one another," they said.

But the story of the conflict is more than just higher oil prices, CBA said.

Fuel is an input across the economy, and as businesses pass on higher transport and energy costs, underlying inflation will rise across the board.

Supply chains for broader industrial and agricultural inputs, such as fertiliser and aluminium, are also being disrupted.

Oil is also used to manufacture plastics, the costs of which have soared since the war broke out, JP Morgan analyst Ben Jarman said.

"Higher plastics costs should be impacting a broad swathe of other manufacturing processes including furniture, pharmaceuticals and printing, as well as construction to a lesser extent," he said.