Australia’s inflation rate has reached a three-year high due to surging oil prices flowing through the economy, with experts warning it could be a repeat of the 1970s “stagflation” problem.

In a grim investment note, MLC senior economist Bob Cunneen says the effective shutdown of the Strait of Hormuz – a key waterway where 20 per cent of the world’s oil passed through – could drag Australia back to a 1970s stagflationary period.

“The global economy currently confronts the prospect of both rising inflation and unemployment because of this Iran war,” he said.

“This stagflation mix of both higher inflation and unemployment creates a major policy dilemma for central banks.” Stagflation is the worst possible outcome for an economy as inflation continues to rise even as spending drops.

It last occurred in Australia in the mid 1970s due to another oil price shock.

Before the Middle East conflict, oil prices were about $US56 ($A80) per barrel, before temporarily touching $US120 (A$167) per barrel.

For every $10 increase in the price of oil, Australians pay an extra 10 cents at the fuel pump.

Mr Cunneen points out oil prices have already surged 97 per cent in US dollar terms this year, creating problems for motorists – although this has partially been offset by the government’s decision to halve the fuel excise and give back the GST windfall.

This follows previous warnings from The International Energy Agency in March, which said the Middle East conflict had created the largest supply disruption in history.

Mr Cunnan’s warning follows a call from HSBC chief economist Paul Bloxham that Australia will be in a stagflationary period for two of the next three quarters.

“As we see it, a stagflationary shock has arrived,” he wrote in a note to clients.

“Could it be genuine stagflation – like the 1970s? This depends on how persistent it is.

And, importantly, on what policymakers do next.” Mr Bloxham stopped short of calling this a repeat of the 1970s, but said risks were rising for policy makers.

“Australia faces a stagflationary shock, and we expect that outright stagflation is a rising risk.

The aim for policymakers ought to be to keep it brief and optimal policy settings could help to make it so,” Mr Bloxham said.

Australia's Cash Rate 2022 He said inflation was already running above target – which was at 3.7 per cent prior to the Middle East war – meaning Australia was not well placed to deal with any negative shocks.

“Because Australia’s economy has little or....