A ceasefire is good. But Trump’s impact on rates is just starting

It is difficult to see Donald Trump’s war on Iran as anything other than a major own goal.And who’s going to pay the economic cost?It’s likely, we all will.I’m not only referring to higher prices at the petrol bowser, I’m also talking about higher inflation and interest rates.It’s now been about six weeks since the Iran war broke out, and economically speaking, a couple of things are fairly clear. First, the economic legacy of this conflict will be a major disruption to energy markets, which will result in higher inflation, even if last week’s ceasefire holds. In other words, we’ll be paying a price for the conflict through goods being more expensive than otherwise and, most likely, home owners will cop higher interest rates than they would have. These outcomes are likely even if Australia avoids the worst-case scenario of running out of fuel. From our partners Second, it’s also becoming clear that global sharemarkets do not view the war and its fallout as a massive economic shock on par with COVID-19 or the global financial crisis. But the sharemarket is not the economy. Last week, Australia’s sharemarket had its best day in about a year, as the Aussie dollar also rose and investors cheered the ceasefire. It is definitely good economic news that the two sides agreed to a ceasefire – however shaky. Unfortunately, this won’t stop our inflation problem. There are a few reasons for this. The big one is it’s highly unlikely the global price of oil will return to its pre-war level this year, even if it comes down a bit. We’ll probably be paying higher than pre-war prices for petrol and diesel for months to come, if not longer. Why will the price of oil most likely stay higher for longer? Because there are still major problems that need to be resolved to get oil flowing around global energy markets. These will take months or longer to sort out. Some of these problems are physical blockages in supply. Attacks on tankers have slashed number of ships moving through the Strait of Hormuz – through which about 20 per cent of global oil shipments normally move – to a virtual trickle.