RBA Deputy Governor's Stark Warning on Stagflation Risks

Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser has sounded the alarm on a potential stagflation scenario gripping the Australian economy. Speaking at a fireside chat hosted by the Money Marketeers of New York University, Hauser described stagflation as a 'central banker's nightmare,' characterized by stubbornly high inflation coinciding with stagnating economic growth and weakening activity. This comes amid escalating global energy prices triggered by the ongoing Middle East conflict involving Iran, which has unleashed a severe fuel shock on import-dependent Australia.

Hauser's comments underscore the precarious balance central banks must strike when supply-side shocks like soaring oil prices collide with pre-existing inflationary pressures. With consumer confidence plummeting to levels reminiscent of the early COVID-19 period, the RBA faces tough choices ahead of its May 4-5 board meeting.

What Exactly is Stagflation and Why is it So Feared?

Stagflation refers to a toxic economic combination of stagnation (slow or negative growth) and inflation (rising prices). The term blends 'stagnation' and 'inflation,' highlighting how high unemployment, weak GDP expansion, and accelerating prices occur simultaneously—a scenario that defies traditional monetary policy tools. Central banks typically combat inflation by raising interest rates to cool demand, but this can exacerbate stagnation by curbing spending and investment further.

Australia last grappled with stagflation-like conditions in the 1970s and early 1980s, when OPEC oil embargoes quadrupled global crude prices, fueling double-digit inflation alongside recessions. Unemployment peaked above 10 percent, and inflation hit 17 percent in 1982. Today's risks echo that era but with modern twists: Australia's economy is more service-oriented, yet its heavy reliance on imported diesel amplifies vulnerabilities.

The Middle East Fuel Shock: Root Cause of the Crisis

The catalyst is the intensifying Iran war, now in its seventh week, which has disrupted oil supplies through the Strait of Hormuz and heightened geopolitical tensions. Brent crude oil prices have roughly doubled since the conflict erupted, hovering around $100-110 per barrel in April 2026, up from pre-war levels near $50-60. West Texas Intermediate (WTI) has followed suit, settling near $99 recently.

Australia, the world's highest per capita diesel consumer, imports over 90 percent of its refined fuels, with diesel critical for trucking, mining, and agriculture. Unleaded petrol prices surged 30-40 percent in March, while diesel jumped nearly 80 percent. This has created a 'big real income shock,' as Hauser put it, rippling through transport costs and everyday expenses. The federal government responded with a temporary 26 cent per liter cut to the fuel excise to cushion the blow.

Consumer Confidence Plunges to Near-COVID Lows

The Westpac-Melbourne Institute Consumer Sentiment Index cratered 12.5 percent in April to 80.1 points from 91.6 in March—the sharpest monthly drop since the COVID-19 onset in 2020. This places it near lows from the early 1990s recession and the initial pandemic shock, though still above the absolute troughs. Near-term expectations fell to levels last seen during the 2022-24 inflation surge, driven by fears of higher fuel bills, mortgage payments, and job losses.

Households are bracing for prolonged pain: five-and-a-half-year highs in job loss worries, combined with elevated mortgage stress from recent rate hikes. Westpac senior economist Matthew Hassan noted Australians face 'another cost-of-living shock,' with finances under 'intense pressure.' Lower confidence often precedes reduced spending on big-ticket items like cars and homes, signaling weaker retail and housing activity ahead.

Business Confidence Collapses Amid Cost Pressures

Business sentiment echoed the gloom, with the NAB Business Confidence Index plunging 29 points to -29 in March—the second-largest fall on record, behind only the Global Financial Crisis and COVID shocks. Business conditions held steady at +6 points, but purchase costs skyrocketed 3 percent—the largest monthly rise ever—while labor costs flattened at 1.5 percent.

Firms in transport, logistics, and manufacturing are hit hardest by diesel hikes, passing on costs to consumers and risking a wage-price spiral. AMP economist My Bui warned of 'tough times ahead,' with input costs fueling inflation expectations. Confidence 34 points below long-run averages suggests investment delays and hiring freezes.

Photo by Stephan HK on Unsplash

Mounting Inflation Pressures Challenge RBA Target

Headline inflation stands at 3.7 percent, above the RBA's 2-3 percent target band, with underlying (trimmed mean) measures about 1 percentage point above the midpoint pre-shock. The fuel surge is expected to push headline CPI higher short-term, with CBA forecasting a near-1 point jump to 4.6 percent by March 2027—almost double the target. Hauser stressed inflation was 'already too high,' lacking 'high confidence' rates are sufficient.

Supply constraints exacerbate stickiness: limited diesel stocks (government released 20 percent reserves), global refining bottlenecks, and potential second-round effects if businesses hike prices opportunistically. The RBA monitors for entrenched expectations, a key stagflation hallmark.Read Hauser's full comments on ABC News.

RBA's Policy Dilemma: Rates Up Despite Weak Growth?

The cash rate sits at around 4.1 percent after two hikes this year, reversing prior cuts. Markets price a 64 percent chance of another rise at May's meeting. Hauser indicated rates may need further tightening to anchor inflation, even risking deeper slowdown: 'There wasn't a lot the RBA could do to stop inflation rising in the short-term,' but medium-term control is paramount.

This pits demand suppression against growth support. Prolonged conflict could tip into recession, with unemployment rising from current lows. RBA Governor Michele Bullock's team weighs upside inflation risks against activity downside, earning their keep in Hauser's words.

Sectoral Impacts: Transport, Retail, and Mining in the Firing Line

Diesel-dependent sectors bear the brunt. Trucking firms face 80 percent fuel cost hikes, squeezing margins and raising grocery delivery prices—transport accounts for 30-40 percent of food costs. Mining, vital to GDP, sees higher operational expenses amid constrained supply capacity.

Retail sales likely soften as households prioritize essentials; Qantas flagged 32 percent fuel cost jumps. Airlines, manufacturing, and agriculture face cascading effects. A table of impacted sectors:

Longer-term, diversification to LNG or EVs could mitigate, but transition lags.Guardian analysis on sectoral fallout.

Household Strains: From Pump to Paycheck

Average households could see $50-100 weekly fuel bills double, eroding disposable income amid 7 percent mortgage rates. Lower-income families, reliant on older vehicles, suffer most. Job insecurity spikes, with unemployment expectations at multi-year highs.

• Fuel: Petrol $2.50-3.00/L, diesel $2.80+.
• Groceries: +5-10% short-term.
• Mortgages: Variable rates strain 60% borrowers.
• Savings: Confidence drop signals spending cuts.

Government relief like excise cuts helps temporarily, but sustained support eyed.

Global Context and Australia's Unique Vulnerabilities

IMF warns of global recession risks, third this century. Australia, commodity exporter, benefits from higher iron ore/LNG but diesel imports (90%+) expose it. Per capita diesel use tops world charts, amplifying shock versus peers like US (domestic production).

Comparisons:

• US: Buffered by shale oil.
• Europe: Diversified but exposed.
• China: Strategic reserves cushion.

Photo by LSE Library on Unsplash

Outlook: Recession Risks and Policy Paths Forward

If war persists, stagflation odds rise: inflation peaks mid-2026 at 4.2 percent, GDP growth <1 percent. Recession probability climbs if oil >$120/bbl prolonged. Solutions:

• RBA: Vigilant rate path, forward guidance.
• Govt: Fuel reserves release, subsidies, efficiency incentives.
• Business: Cost controls, supply chain resilience.
• Consumers: Budgeting, EV adoption.

De-escalation in Middle East key; diplomacy vital. RBA's balancing act will define 2026 resilience.Bloomberg on confidence crash.

Stakeholder Perspectives and Actionable Insights

Economists like Westpac's Hassan urge fiscal prudence; businesses call for excise permanence. Households can track RBA data, diversify transport. Investors eye defensives: utilities, healthcare. Long-term: Boost domestic refining, renewables to cut import reliance.

Australia's adaptability—post-COVID rebound—offers hope, but vigilance essential.