Extract from ABC News
Analysis
Anthony Albanese's government will be watching the actions of Donald Trump closely in coming weeks. (Reuters: Kevin Lamarque)
"It's a brilliant situation."
That was Donald Trump's bizarrely upbeat summation yesterday of the politically devastating war in Iran, just before the brutal verdict of US mid-term voters began rolling in.
"We seem to be getting everything we want," the president told the Financial Times, talking up the amount of oil now flowing through the Strait of Hormuz.
American voters clearly see things differently. Fed up with what they're paying for that oil, and with another drawn out foreign entanglement, they've taken their anger out at the ballot box with a stinging rebuke across once reliably Republican states including Texas, Iowa and Kansas.
The question now is what a weakened and famously unpredictable president does next.
Trump's immediate pledge to work with Democrats in Congress was a positive sign. How long that may last is anyone's guess.
If this election was a repudiation of the war, how will Trump respond?
The arguments inside his administration now matter even more. Vice President JD Vance is seen to be in the de-escalation camp, preferring a negotiated settlement. Secretary of War Pete Hegseth is said to favour escalation and a more intense bombing campaign.
Trump's own description of the status quo as "brilliant" suggests there are no easy answers, and he may prefer to muddle along with things as they are.
The voters have just made that considerably harder.
Cost-of-living casualties
What Trump does next won't matter just in Washington.
US allies, including Australia, are becoming increasingly outspoken about this war and its shock wave of inflation.
The Albanese government initially supported the US strikes aimed at denying Iran a nuclear capability. It didn't anticipate the economic damage this would ultimately create. Nor did it expect the conflict to drag on for 9 months and counting.
Treasurer Jim Chalmers, with the authorisation of colleagues, has led the escalating rhetorical charge.
"If it was up to me, from an economic point of view, the war in the Middle East would end today," the treasurer told Radio National, "because Australians are the cost-of-living casualties of decisions taken in DC and Tehran."
After this mid-term result, expect even bolder calls to end this war.
The risk for the treasurer is the louder he blames the US and Iran, the more he is seen to be passing the buck on his own responsibilities for inflation.
Jim Chalmers is expected to increase his criticism of the war in Iran, particularly how it's impacting the hip pockets of Australians. (ABC News: Ian Cutmore)
As the Reserve Bank governor made clear, this week's interest rate hike, the fifth this year, was not due to the "direct impact of oil prices on inflation". Michele Bullock said this was about dealing with "domestic capacity pressures".
But the Reserve Bank is hardly pretending global oil price is playing no role here. It clearly is.
Either way, the government knows it must do more to tackle inflation. It's promising spending cuts in what is now looming as a crucial mid-year budget update next month.
If Labor is judged to be unserious about this challenge, when Bullock is warning the next 12 months will "feel like a recession", the government will be in even more political strife.
The uncertainty of the moment
But this is not as straightforward as it might seem. The economy is at a delicate point, particularly after this latest rate rise. There are real and widespread concerns within the government about cutting too hard.
The downturn in the housing market is proving sharper than was expected when the negative gearing and capital gains tax changes were announced in May. While lower house prices alone aren't seen as a problem, the impact on already soft consumer sentiment and spending is.
There's also a growing concern within the government about the jobs market deteriorating faster than was expected.
This nervousness about tipping an economy that already "feels like a recession" into an actual downturn explains the reluctance to commit to "net savings" in the budget update.
The prime minister remains confident inflation and interest rates will come down in time for the 2028 election. A recession along the way is most definitely not part of his plan.
A mid-year slash and burn to tame the inflation dragon is not on the cards.
The government is left in an awkward situation. Cut too little and look weak on inflation. Cut too hard and risk making a bad economic situation worse.
Even the Reserve Bank governor acknowledges the uncertainty of the moment.
"We do our best with our forecasts," Bullock said after delivering this week's rate hike, "but they're uncertain, and things change, and who knows?"
To all that economic uncertainty, Australia can now add another variable: a wounded Donald Trump.
"Brilliant" is hardly a word the Albanese government would use to describe this outlook.
David Speers is national political lead and host of Insiders, which airs on ABC TV at 9am on Sunday or on iview.
