Highlights

  • Higher energy prices exceed the assumptions in the RBA’s August forecasts.
  • The AI boom and extreme weather add to agricultural and technology price pressures.
  • Businesses face rising transport costs as short-term Inflation expectations remain elevated.

A renewed energy shock is adding to Australia’s inflation problem, while the global artificial intelligence boom and extreme weather are placing further pressure on prices. Reserve Bank of Australia Governor Michele Bullock outlined these overlapping costs in her 28 October 2026 Senate committee statement, warning that inflation was likely to be higher than the central bank’s August base case.

Middle East Escalation Lifts the Energy Bill

The conflict in the Middle East has re-escalated, leaving global energy prices much higher than assumed in the RBA’s August forecasts. Oil and related prices have risen sharply again, creating both direct and indirect inflation pressures.

Bullock said energy costs would add materially to inflation. Businesses facing higher transport and related expenses would attempt to pass them on, extending the effect beyond the initial price shock. Short-term inflation expectations are also elevated.

The impact of the conflict on economic activity has been relatively modest so far. That assessment sits alongside a stronger warning about its price effects, with inflation expected to remain elevated for some time.

AI Demand Meets Constrained Supply

Energy is only part of the international cost story. Bullock said the AI boom and extreme weather events were contributing to upward pressure across a range of agricultural and technology-related prices.

The global AI boom is supporting stronger growth in economies that play key roles in the AI Supply chain. That growth is helping drive higher global prices for some AI-related technologies where supply is constrained.

Within Australia, Business Investment growth has picked up strongly, driven mostly by spending on data centres and renewable energy projects. Household spending growth, by comparison, has moderated only gradually as monetary tightening works through the economy.

Domestic Pressures Keep the Policy Challenge Broad

Bullock stressed that global developments were compounding an inflation problem that also has domestic roots. Underlying price pressures remain elevated even after large volatile movements, such as fuel, are excluded.

Persistent capacity constraints and weak productivity mean the Australian economy cannot grow strongly without putting pressure on inflation. The RBA therefore sees a need for further subdued growth in aggregate demand, despite the slowdown already under way.

Recent inflation has been around 3½ to 4 per cent in year-ended terms. The August forecasts had indicated a return to around the midpoint of the 2–3 per cent target range only in late 2027, with risks already tilted upwards.

The Central Bank has raised the cash rate target by 100 basis points this year, but the full effects are still to be felt. At its next meeting, the Board will examine the flow of data and whether that tightening is sufficient. Bullock said central banks in many other advanced economies were also raising policy rates or signalling readiness to act if needed.