Australia’s Chalmers says Iran war could raise inflation, weigh on GDP

Australia’s Treasurer Jim Chalmers said on Wednesday that Iran war could add a further quarter of a percentage point to headline inflation and double the negative impact on Gross Domestic Product (GDP).

Key quotes

Treasury modelling two scenarios - oil stays at $100 per barrel for h1, or hits $120 and takes three years to get back to pre conflict price.

Compared to treasury modelling a week ago, latest figures suggest Iran war could add a further quarter of a percentage point to headline inflation and double the negative impact on GDP.

Latest estimates see headline inflation peaking 0.75 of a percentage point higher in the short term scenario and 1.25 percentage point higher in the prolonged one.

In the short term case, output would be 0.2% lower around the middle of this year.

In both scenarios prospect of inflation peaking in the high 4s or even higher this year is very real.

In prolonged scenario, gdp would be 0.6% lower in 2027 and even by 2029 would still be below where it would have been without the conflict.

Around half of the impact to GDP is due to the impact of higher oil. The other half is due to broader consequences.

Market reaction

At the time of writing, the AUD/USD pair is up 0.22% on the day at 0.7120.