Treasurer Jim Chalmers has warned that inflation could climb to the mid to high four per cent range as escalating conflict in the Middle East drives global oil prices higher. Treasury is modelling multiple scenarios ahead of the May federal budget, with early forecasts suggesting inflation could approach five per cent if elevated oil prices persist. Inflation is currently sitting above the Reserve Bank of Australia's target range of two to three per cent.

Oil prices have surged in recent weeks, at one point reaching around 120 United States dollars a barrel, intensifying concerns about further cost-of-living pressures. While Treasury expects higher inflation and slower economic growth, it does not currently predict a recession or a contraction in the economy.

Chalmers said the government has no plans to change the fuel excise but is working with the Australian Competition and Consumer Commission to monitor potential price gouging. The Reserve Bank of Australia is due to meet next week, with financial markets anticipating a possible interest rate rise as the opposition argues households were left vulnerable to the inflation shock.