In brief
- The Australian Bureau of Statistics has revealed that headline inflation grew to 4.6 per cent in March.
- The steep climb is expected to trigger a rate rise from the Reserve Bank of Australia next week.
Inflation has risen to its highest level since 2023, surging from 3.7 per cent to 4.6 per cent in March.
New data released by the Australian Bureau of Statistics on Wednesday shows that the cost of fuel, driven by the war in the Middle East, has pushed the Consumer Price Index up 0.9 per cent.
The quarterly trimmed mean, the Reserve Bank of Australia's preferred method of gauging inflation, remained steady at 3.3 per cent. In February, the RBA had forecast the trimmed mean to hit 3.7 per cent in June.
Early data from the London Stock Exchange suggested that traders were less certain of a rate hike in May off the back of the figures, with 76 per cent now predicting one, down from the 86 per cent prior to the release.
"This isn't as big as myself and a lot of other economists were expecting, which suggests some other parts of the basket, outside fuel, were a little bit softer than we were perhaps expecting," Ben Udy, lead economist at Oxford Economics Australia, told the ABC.
Most economists, however, are still predicting that the rise will trigger a rate hike from the RBA on Tuesday.
"We continue to expect the RBA will hike 25 basis points in May, taking the cash rate to 4.35 per cent," ANZ economists Madeline Dunk and Adam Boyton told the Australian Associated Press before the figures were released.
Transport costs, driven by rising fuel prices, saw the biggest jump in monthly inflation, growing by 9.2 per cent in March.
Housing, one of the biggest annual drivers of inflation, increased just 0.1 per cent across the month.
The ABS categories of clothing and footwear, furnishings, household equipment, and services, and recreation and culture all saw drops in spending of between -0.3 and -0.6 per cent.
If the RBA does increase the cash rate, it will be the third time this year, after 25 basis point increases in both February and March.
Oil prices driving inflation
Treasurer Jim Chalmers has said that the conflict in the Middle East has driven inflation growth as he prepares to hand down the federal 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 have faster growth than any other advanced economy to finish up 2025," he told reporters in Brisbane on Wednesday.
"Even with the spike in inflation from higher fuel prices coming out of the Middle East, we still have inflation substantially lower than what we inherited and what we saw in 2022."
Chalmers pointed to the government's halving of the fuel excise in response to the crisis as one of the ways in which it is trying to "take the sting" out of the global turbulence.
Automotive fuel prices surged 32.8 per cent from February to March, which contributed to inflation, though the data pre-dates the halving of the fuel excise on 1 April.
Full impact of the war yet to be felt
The conflict in the Middle East broke out on 28 February when the United States and Israel launched joint strikes on Iran, which responded by attacking its Gulf state neighbours, damaging fossil fuel infrastructure, and blockading the Strait of Hormuz.
The waterway is a vital shipping lane through which roughly a fifth of the world's oil and gas is transported, with its closure spiking prices globally.
Brent crude has surged from below US$70 ($97.60) per barrel to over US$110 ($153.38) per barrel and remains high as peace talks between the US and Iran continue to stall.
The flow-on effects of the disruption to global trade, which has also hampered supplies of fertiliser, aluminium, and other industrial components crucial to everyday items, are expected to take months to be fully clear in Australia.
"We think the underlying picture will deteriorate in the June quarter when we see second and third round effects come through," Besa Deda, chief economist at accounting and advisory firm William Buck, told ABC News on Wednesday before the data was released.
"It's almost, I think, inevitable that we will see more tightening, particularly given that inflationary pressures were already building before these hostilities broke out, and now the hostilities in the Middle East have really amplified those inflationary pressures."
Headline inflation will also receive a significant leg up from electricity prices, which are set to record a jump of about 20 per cent quarter-on-quarter as a result of government subsidies rolling off, economists at JP Morgan said.
Borrowers under pressure
More than a quarter of Australians with a mortgage are "at risk" of "mortgage stress" following the two consecutive rate hikes in February and March.
New data from polling company Roy Morgan shows that 1.44 million borrowers are now in the at-risk category, up by 130,000 in the past month. The data found 18.9 per cent are thought to be "extremely at risk", a significant jump above the two-decade average of 16.3 per cent.
The RBA targets a 2-3 per cent band of inflation, and uses lending rate increases to cool discretionary consumer spending. Banks pass on the cash rate rise to borrowers, and mortgage payments increase as a result.
Roy Morgan CEO Michele Levine has said that potential rate hikes in May and June would push interest rates to their highest level in nearly 15 years.
While the conflict in the Middle East has "introduced a considerable amount of uncertainty into global economic forecasts", she has said that there are positive economic indicators for the country.
"The good news — at least for the short-term — is that the Albanese government has been quick to assure Australians the country is well supplied with energy over the next four to six weeks at least.
"The employment market has been strong over the last four years (Roy Morgan estimates show over 1.2 million new jobs have been created since the Albanese government was elected in May 2022) and this has provided support to household incomes, which have helped to moderate levels of mortgage stress despite interest rates being significantly higher than in May 2022.”
For the latest from SBS News, download our app and subscribe to our newsletter.
