A drawn-out war in the Middle East could add an extra 5% to existing inflation in Australia, our new modelling shows.

We looked at the likely impacts of two different scenarios: a moderate disruption with the war ending in mid-April, and a drawn-out war ending by September.

We found higher fuel costs would affect freight, food production and manufacturing – pushing up costs for all kinds of goods, from steak to steel. At the same time, economic growth is likely to slow.

If both pressures persist, Australia faces the risk of a painful combination known as “stagflation”: rising prices and a slowing economy.

But if there’s any silver lining in our new modelling, it’s that Australia would fare better than some of its nearest neighbours, including Singapore, Thailand, Japan and South Korea.

Two different futures

To analyse where things might be headed, we used an advanced economic modelling tool called the Global Trade Analysis Project model. This model is widely used in international trade and energy policy research.

It allows us to trace how an oil price shock spreads through trade, production costs, industry output and household spending across the global economy.

Our moderate scenario assumes a disruption lasting six weeks in total – meaning it’s over by mid-April – with the Brent crude oil price settling at around US$90–$100 (A$130–$145). This is in line with other baseline modelling by insurance firm Allianz, where a ceasefire is negotiated.

Our severe scenario assumes the conflict goes on for six months in total, ending by around September, with the price of Brent crude at US$100–$150........

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