Inflation soars to near three-year high off back of petrol prices, making rate rise more likely

Home borrowers are expected to be hit with a third, consecutive interest rate hike next week after the first full month of the Iran war pushed inflation to a three-year high of 4.6 per cent and caused a one-third surge in fuel prices.

Automotive fuel prices soared by a record 32.8 per cent in March alone and by 24.2 per cent over the year with unleaded prices surging above $2.50 a litre and diesel surpassing $3 a litre for the first time ever.

The worst consumer price index reading since September 2023 was also much higher than other advanced economies, after crude oil prices last month hit record-high levels above $US100 a barrel and caused a spike in transport costs.

Goods inflation is now a much bigger problem than higher service costs with the increase in fuel prices even more severe than the early stages of the Russian invasion of Ukraine in 2022.

With crude oil prices now at $US111 a barrel, Treasurer Jim Chalmers is expecting motorists to pay more, after the Federal Government this month temporarily halved fuel excise to 26.3 cents a litre until the end of June, to deal with the worst global oil shock since the 1970s.

“That will obviously impact prices at the bowser going forward,” he said on Wednesday.

The bad news on inflation increases the chance of the Reserve Bank of Australia raising interest rates again on May 5, and marked a huge jump from February’s annual headline inflation pace of 3.7 per cent before the US airstrikes on Tehran.

“We already had an inflation challenge in our economy, we know that, before the conflict, but the tick up in the monthly headline data today was driven by the conflict and this war could drive inflation up even higher before it comes back down again, ” Dr Chalmers said.

“Treasury’s expectation is that inflation is likely to peak higher than this but they are still finalising their forecasts ahead of the Budget next month.

“We know the Australian economy is not immune from all of this global uncertainty and volatility and unpredictable conditions, but we are better placed and better prepared and with faster growth than any major, advanced economy.”

While the Middle East crisis is a global problem, Australia’s 4.6 per cent inflation rate was still much higher than Canada’s 2.4 per cent level, New Zealand’s 3.1 per cent pace, and the US and UK on 3.3 per cent.

Most rich nations, except the United States, have higher unemployment than Australia.

“The highest inflation amongst major advanced economies is not a bug, it’s a design feature of the economy Labor built,” shadow treasurer Tim Wilson told The Nightly.

“Until Labor stops pouring debt petrol on the inflation fire, Australians will watch their wages go backwards and be able to buy less at the supermarket.”

Westpac chief economist Luci Ellis, a former Reserve Bank official, said higher fuel prices were already adding to broader price pressures.

“The RBA could look through higher fuel prices if that was all that was happening, but it is not,” she said.

“Pass-through to other non-fuel prices is clearly starting, touching everything from building products to takeaway food if the reports we are receiving are any guide.”

Next week, home borrowers would be copping the third consecutive RBA meeting increase for the first time since March 2023, with inflation now even further above the RBA’s 2-3 per cent target.

“Today’s CPI print, the first to partially reflect the Strait of Hormuz closure, points to a rate hike from the Reserve Bank of Australia next week,” Deloitte Access Economics partner Stephen Smith said.

“That rate hike is not guaranteed, but Australia’s starting point for inflation heading into this crisis likely leaves the central bank with little choice.”

Another 25 basis point rate hike next week would also reverse the RBA’s three cuts last year and take the cash rate back to 4.35 per cent for the first time since February 2025, before the last election.

“Well, we understand that the movements in interest rates have a big impact on household budgets,” Dr Chalmers said.

“There were three interest rate cuts not that long ago which saved Australians some money in their monthly household budgets, and on the other side of the ledger, when interest rates go up, obviously it more pressure on people.”

With slower economic growth and the prospect of higher unemployment troubling the Reserve Bank, the Commonwealth Bank’s head of Australian economics Belinda Allen is expecting another split decision on the monetary policy board.

“We expect another split decision with recent falls in sentiment surveys likely to bolster arguments to leave the cash rate on hold and wait and see how key indicators track from here,” she said.

“Those arguing for a rate hike will focus on inflation being too high, the labour market still too tight and rising cost pass through from the war in Iran.”

Without volatile items, underlying inflation grew by 3.3 per cent over the year, which was still above the Reserve Bank’s target band.

“Ultimately, underlying inflation remains too high, sitting well above the mid-point of the RBA’s 2-3 per cent target band,” Ebury economist Anthony Malouf said.

“Indeed, with headline CPI subject to ongoing volatility from the Middle East conflict, the board is likely to look through near-term headline moves and focus on underlying inflation to guide its policy decisions ahead — which, at current levels, remains uncomfortably elevated.”

The blockade in the Strait of Hormuz saw transport costs climb by 8.9 per cent over the year, which was even higher than the goods inflation increase of 5.5 per cent, the Australian Bureau of Statistics data released on Wednesday showed.

“Most businesses are unable to pass on these costs, with 64 per cent reporting that they are absorbing the higher costs,” Australian Chamber of Commerce and Industry chief executive Andrew McKellar said, citing a survey of its members.

Clothing and footwear costs went up by 7 per cent.

Higher prices for diesel, needed to harvest and transport crops, are yet to be felt at the supermarket.

Fruit and vegetable prices rose by a more moderate 1.8 per cent over the year but fruit prices did soar by 4.3 per cent as a result of higher prices for strawberries, blueberries and apples.

Meat and seafood prices rose by 4.8 per cent but bread and cereal prices rose by just 0.6 per cent, with the data yet to reflect weaker wheat harvests expected later in the year flowing from higher diesel prices.

Services inflation is now less of a problem, growing by 3.6 per cent on an annual basis but education costs rose by 4.8 per cent.

Housing costs, covering rents and mortgage repayments, surged by 6.5 per cent and more rate rises would add to an already financially tight set of circumstances.

While the inflation jump in March was less severe than early 2022, after Russia’s invasion of Ukraine sparked oil sanctions, the one-third increase in automotive fuel prices was the most severe in monthly ABS records going back to 2017.