Highlights

  • Petrol and diesel prices were 13% above the RBA's August 2026 forecasts at the time of the September Board meeting.
  • Bullock told senators on 28 October that oil and related prices have increased sharply and will add materially to inflation.
  • Higher fuel costs have partially passed through to prices of other goods and services, the Board's September statement noted.
  • The RBA responded to the oil shock with a rate rise because of the risk it would push already-elevated inflation higher and embed expectations.

A global energy shock has arrived in the middle of Australia's tightening cycle, pushing fuel prices well above the Reserve Bank's forecasts and adding to an already elevated inflation reading. Governor Michele Bullock has described the renewed oil price rise as something that "will add materially to inflation," linking events in the Middle East directly to Australian mortgage costs.

The Gap Between Forecast and Reality

The minutes of the Board's 29 September 2026 meeting recorded that petrol and diesel prices were 13% above the August Statement on Monetary Policy forecasts. Central bank forecasts typically use current market prices for oil as a working assumption. When energy prices move sharply after the forecasts are set, the projections become outdated quickly. A 13% gap represents a significant deviation from the assumed path.

Bullock noted at her Senate appearance on 28 October that renewed conflict in the Middle East had pushed global energy prices well above the August assumptions. She described the impact: "Oil and related prices have increased sharply again and will add materially to inflation." She also noted additional global cost pressures from AI demand, agriculture, and extreme weather as separate sources.

How the Shock Reaches the Wider Economy

The most direct channel is through petrol prices, which appear in the headline CPI basket immediately. Beyond the bowser, the Board noted in September that "higher fuel prices have partially been passed through to prices of other goods and services." Fuel is an input into freight, logistics, agriculture, and many service sectors. As transport costs rise, businesses face higher input costs and some of those costs are passed on to consumers.

This pass-through dynamic is what transforms an energy shock from a narrow price rise into a broader inflation concern. When pass-through is limited and temporary, a central bank can often look through the spike. When pass-through is spreading, as the Board noted it was by September, the risk of the shock feeding into broader price expectations rises.

Why the RBA Responded Despite Not Controlling Oil Prices

A common question is why the RBA raised rates in response to an oil shock that interest rates cannot directly reverse. The Board's answer, visible in the September minutes, is that the energy shock is not isolated: it is arriving when inflation is already above target, demand is running above potential, and expectations need to be anchored.

Headline CPI was 4.3% on the monthly measure for September. Underlying inflation had been around 3.5% for six months. In that environment, allowing an energy-driven lift in headline inflation to persist risked convincing households and businesses that inflation would remain elevated, which would make reducing it harder and more costly over time.