What caused the recent Australian inflation surge?

The primary driver is the oil shock from the Iran war disrupting the Strait of Hormuz, causing automotive fuel prices to jump 32.8% monthly to March 2026, per ABS data.

How high are petrol prices in Australia now?

Unleaded at 228 cents/L, premium 250 cents, diesel 256 cents post-March spike. Government excise cut eased some pressure from April.

Will the RBA hike rates in May 2026?

Markets expect a 25bps rise to 4.35%, as trimmed mean holds at 3.3% but headline risks upside from energy costs. Check RBA updates .

What are the main CPI categories affected?

Transport +8.9%, housing +6.5%, food +3.1%. Fuel and electricity dominate.

How does this compare to past oil shocks?

Like 1970s OPEC crisis (inflation to 17.6%), but Australia's service economy offers some buffer; RBA learned to prioritize inflation control.

What impacts businesses?

Logistics faces diesel triples, potential $42B GDP hit per EY; food chains at risk of shortages.

Government responses so far?

Halved fuel excise temporarily; debates on gas taxes, reserves. IMF advises against wasteful relief.

Inflation forecasts for 2026?

IMF: 4%; peaks 5-6% mid-year per banks; eases 2027 if conflict resolves.

Tips to save on fuel?

Check tyres weekly. Use cruise control. Lighten load. Shop cycles.

Risk of stagflation in Australia?

High inflation + low growth possible; oil supply shock slows activity while prices rise, echoing 1970s but milder due to diversification.

How long will oil shock last?

Depends on Middle East; analysts say 6-12 months for normalisation if Hormuz reopens fully.

Australian Inflation Surge: Oil Shock Hits 4.6% CPI

5 us dollar bill — Photo by Joshua Hoehne on Unsplash

Breaking Down the Latest CPI Data

Australia's Consumer Price Index (CPI), the key measure of inflation that tracks changes in the price of a basket of goods and services bought by households, has climbed to 4.6 percent in the 12 months to March 2026. This marks the highest annual rate since September 2023 and a sharp jump from 3.7 percent in February. The monthly figure rose 1.1 percent from February to March, driven primarily by soaring energy costs. While the trimmed mean inflation – the Reserve Bank of Australia's (RBA) preferred gauge of underlying price pressures that excludes volatile items – held steady at 3.3 percent annually, the headline surge signals immediate challenges for households and policymakers alike.

Transport costs led the charge with an 8.9 percent annual increase, fueled by a staggering 24.2 percent rise in automotive fuel prices over the year and a 32.8 percent monthly spike – the largest since 2017. Regular unleaded petrol jumped from 171 cents per litre to 228 cents, premium to 250 cents, and diesel to 256 cents. Housing followed at 6.5 percent, boosted by electricity prices up 25.4 percent after government rebates expired. Food and non-alcoholic beverages rose 3.1 percent, adding to grocery bills already strained by supply chain ripples.

The Oil Shock at the Heart of It All

The culprit behind this inflation resurgence is an unprecedented oil shock stemming from the Iran war and disruptions in the Strait of Hormuz, through which 20 percent of global oil flows. Global Brent crude prices have surged amid blockades and threats, pushing import costs higher for Australia, which relies heavily on seaborne oil despite domestic production. The conflict, escalating since early 2026, has seen intermittent closures, tanker seizures, and volatility that refineries struggle to absorb.

Australian petrol prices have hit levels not seen in years, with some stations rationing supplies during Easter peaks. The downstream effects are cascading: higher freight costs for everything from Sydney supermarket shelves to Perth construction sites. Businesses report diesel tripling in some regions, threatening margins in logistics, agriculture, and manufacturing.

Australian petrol pump showing high fuel prices amid oil shock

RBA's Tightrope: Rate Hikes on the Horizon?

The RBA, Australia's central bank responsible for monetary policy to keep inflation between 2-3 percent on average, faces a dilemma. Having hiked the cash rate to 4.10 percent in March – a split 5-4 decision – amid pre-existing pressures like tight labour markets and strong demand, the bank noted risks tilted upward from the oil shock. Governor Michele Bullock has warned inflation could linger above target into 2027.

Markets now price in a May hike, potentially to 4.35 percent or higher, as economists from CBA, ANZ, and Citi forecast headline inflation peaking at 5-5.5 percent by mid-year. Yet, supply-side shocks like oil differ from demand-driven inflation; aggressive hikes risk tipping the economy into recession while failing to address root causes. For more on RBA measures, see their inflation overview.

Household Budgets Under Siege

For the average Australian family, the pain is tangible. Fuel alone accounts for 3 percent of household spending but amplifies costs across groceries (up 3.1 percent), dining out, and travel. With mortgages at record highs post prior hikes, a variable-rate borrower on $600,000 might face $100+ monthly extra per 0.25 percent rise. Consumer confidence has plummeted to COVID lows, with spending shifting to essentials.

Petrol: 30-40 percent higher than pre-shock, eroding disposable income.
Electricity: Rebate expiry compounds bills amid wholesale spikes.
Food: Freight costs push staples like bread and milk higher.

Businesses Reel from Freight and Energy Costs

Transport and logistics, moving 70 percent of freight by road, are hit hardest. Trucking firms eye electric vehicles amid diesel shortages, but transition lags. EY models a prolonged shock shaving $42 billion from GDP in 2026, with investment down $54 billion. SMEs in retail and construction pass on costs or cut jobs; food supply chains risk disruptions if 70 percent of drivers fold under margins.

Agriculture faces fertiliser hikes from oil-derived inputs, threatening harvests. Official data from the Australian Bureau of Statistics CPI release underscores transport's 9.2 percent monthly leap.

Government Measures and Controversies

Treasurer Jim Chalmers halved the fuel excise temporarily, dropping prices 70 cents per litre in capitals post-April 1, but critics call it insufficient amid $16 billion fossil subsidies. Calls grow for gas export taxes or strategic reserves release. Labor resists windfall taxes on LNG giants, balancing inflation fight with energy security. IMF urges avoiding 'wasteful' relief to prevent entrenching price expectations.

Echoes of the 1970s: Lessons from Past Shocks

The 1973 OPEC embargo quadrupled oil prices, spiking Australian inflation to 17.6 percent and mortgage rates to 13 percent, ushering stagflation. Central banks erred by easing prematurely; today's RBA vows vigilance. Unlike then, Australia's economy is service-heavy (70 percent GDP), but import reliance mirrors vulnerabilities.

Outlook: Stagflation Risks and Recovery Path

Forecasts diverge: Treasury sees 0.75 point CPI lift short-term; IMF 4 percent average 2026, easing to 3.2 percent 2027. Prolonged Hormuz closure could hit 6 percent, per RBC. Upside risks include wage spirals in 4 percent unemployment tightness; downside, recession if hikes overkill. Resolution in Middle East key, with ceasefires offering hope but volatility persists.