Escalating unrest in the Middle East likely to see hikes to fuel prices, flights, everyday goods

As the tragic human toll of the escalating conflict between Israel and Iran continues to climb, ripples are also set to be felt through the world’s economy, with Australians’ household budgets not immune.

As the tragic human toll of the escalating conflict between Israel and Iran continues to climb, ripples are also set to be felt through the world’s economy, with Australians’ household budgets likely to feel the impact.

The two countries have traded missiles for three days in a row, after Israel’s surprise attack on targets in oil-rich Iran on Friday.

Here are some ways the conflict could hit Aussie hip pockets if it continues to escalate.

Fuel prices

Oil supplies and the impact to petrol prices will be the key economic factor, should the situation become worse.

AMP chief economist Shane Oliver said oil prices had crept up by about 8 per cent from before the attacks on Thursday but could be a surge if the attacks intensified.

“The more it continues to escalate, the greater the risk that Iranian oil production will be hit and Iran may retaliate by attacking shipping through the Strait of Hormuz, through which about 20 per cent of global oil supply flows daily.

“That’s the strait between the Persian Gulf and The Gulf of Oman, so a lot of oil produced in the Middle East flows through that area.

“If Iran attacks that shipping through that area then that could cause a big supply shortfall and worst case scenario if that occurs, then you can see much higher oil prices from where they are now and therefore a much a bigger impact on petrol prices.”

Risks to oil supplies could raise prices, Dr Oliver said.

Share investments

AMP chief economist Shane Oliver said there hadn’t been much movement yet in markets, but there was a “high risk” they’d react if the attacks continued to escalate.

“Invariably when these things happen, the oil markets get nervous and you see a spike in oil prices, share markets see a bit of a fall and then it comes to nothing and the markets move onto the next thing,” he said.

“It could well be the same this time around, but the stakes are a lot higher because Iran has steadily been moving towards nuclear weapons capability.”

The Australian share market reacted to a 2 per cent drop in the US market on Friday, dipping by about 1 per cent, Dr Oliver said.

The Australian market was back up by about 2 per cent on Monday.

Flights and groceries

Fuel dependent industries like aviation will feel the impacts of restricted oil supply more keenly than others – with their increased costs likely to be passed on to consumers.

Dr Oliver said travellers could expect “higher airline fees associated with higher jet fuel”, if pressure was placed on supplies.

Likewise, truck-reliant consumer goods like groceries could also be vulnerable to fuel-related price increases, driving up general inflation.

Passengers begin to board their Jetstar flight to Sydney at Melbourne Airport. Picture: NewsWire / Ian Currie

Small businesses

Consumers could tighten their purse strings, Dr Oliver said, similar to how they reacted in April with US tariffs.

He added companies in the consumer discretionary category, like retailers, hospitality and casino and gaming, could be affected.

“Small businesses are more vulnerable than big because they don’t have the deep pockets and the cash reserves to draw on,” he said.

AMP chief economist and head of investment strategy Shane Oliver.

RBA still tipped for a rate cut

Mortgage holders may still be in for some relief, with the RBA Rate Indicator, showing market expectations around the official cash rate, tipping an 89 per cent probability of a cut in July.

Dr Oliver said the RBA could pre-empt a threat of inflation by holding off or delaying cuts as a way to curb consumer spending, but he thought it was unlikely.

“It could boost headline inflation, on the other hand it acts as a tax on consumer spending and so you get higher headline inflation but you get less demand in the economy.

“At this stage, I would think we’re still likely to see a cut in July, but I would consider it does add a bit of uncertainty around that.”

Originally published as Escalating unrest in the Middle East likely to see hikes to fuel prices, flights, everyday goods