Key Highlights

Governor Bullock linked inflation to the Middle East conflict and its effect on oil, AI-related demand and extreme weather.

Oil is the most visible in the data, with automotive fuel up 23.6 per cent over the year to September.

The Bank also still sees inflation arising from domestic capacity pressures, and the Financial Stability Review says principal risks increasingly come from abroad.

Reserve Bank Governor Michele Bullock has named three global forces adding to Australian inflation, alongside the domestic pressures the Bank has long highlighted.

Ask most Australians why prices are rising and the answer is likely to involve petrol. Ask the Reserve Bank of Australia (RBA), and the answer is broader.

In her opening statement to the Senate Economics Legislation Committee at Supplementary Budget Estimates on 28 October 2026, Governor Michele Bullock identified global cost pressures linked to three distinct sources: the Middle East conflict, AI-related demand and extreme weather. She placed these alongside domestic capacity pressures as the drivers of inflation that has been above target since the second half of 2025.

Each of the three operates differently, and each reaches Australian prices by a different route. This explainer looks at them in turn, then at how they fit with the domestic side of the story.

Oil: the most visible of the three

Of the three global forces, oil leaves the clearest fingerprints in the latest data. The Australian Bureau of Statistics (ABS) September 2026 Consumer Price Index (CPI), released on 28 October 2026, showed automotive fuel prices up 23.6 per cent over the year and 9.4 per cent in September alone. The ABS attributed the rise to higher world oil prices.

The Governor tied the energy shock to the Middle East, telling senators that the conflict has re-escalated. She also repeated a line from the Monetary Policy Board's 29 September decision statement: "global energy prices are now much higher than had been assumed in the August forecasts." Her conclusion: "Inflation will therefore likely be higher than was our base case in August."

Assistant Governor (Economic) Sarah Hunter, in an interview on 60 Minutes broadcast on 25 October 2026, described the overseas oil shock as one of two challenges facing the RBA. She said oil-driven price pressure is still coming through, and that things will get "a little bit" worse before they improve.

AI demand: a newer source of pressure

Artificial intelligence is a less familiar entry on a central bank's list of inflation drivers. The Governor's statement did not set out in detail how AI-related demand feeds into Australian prices, but it named it explicitly as a global cost pressure.

AI also appears in the domestic picture. Governor Bullock told senators that business investment has picked up, mainly in data centres and renewable energy. Investment of that kind adds to demand for labour, equipment and materials.

The RBA's Financial Stability Review, released on 1 October 2026, offered a more balanced view of AI's economic role. "Optimism around AI is boosting asset prices and has considerable potential to improve productivity and resilience," it said.

That potential is relevant because productivity is a constraint the RBA has highlighted. The Governor told senators that low productivity growth means the economy cannot grow rapidly without adding to inflation pressure. If AI eventually lifts productivity, it could help ease that constraint. In the near term, however, the RBA lists AI-related demand among the forces adding to costs.

Extreme weather: hard to predict, hard to control

The third global force the Governor named is extreme weather. Weather events can disrupt production and supply chains, affecting the availability and price of goods.

The ABS publishes a measure that excludes some of the categories most exposed to such disruptions. The CPI excluding volatile items removes fruit and vegetables and automotive fuel. In September 2026, that measure rose 3.7 per cent over the year, compared with headline CPI of 4.3 per cent.

The ABS release does not attribute specific price movements in September to weather, and the RBA's statement did not quantify the weather effect. What the Governor's remarks make clear is that the Bank regards extreme weather as one of several global factors adding to cost pressures, rather than a purely local or seasonal issue.

Why global costs are only part of the story

It would be easy to conclude from this list that Australia's inflation problem is imported. The RBA has been consistent in saying otherwise.

"we still see inflation arising from domestic capacity pressures," Governor Bullock told senators. At her media conference on 29 September 2026, she was more direct still: "Inflation is too high and has been driven by domestic capacity pressures."

The breadth of price increases supports that view. The ABS reported goods prices up 4.6 per cent over the year and services up 4.1 per cent. Underlying inflation, measured by the trimmed mean, was 3.6 per cent, up from a revised 3.5 per cent in August. The Housing group rose 5.2 per cent and rents 3.6 per cent.

Ms Hunter framed the second of her two challenges as excess domestic demand relative to sustainable supply. Global shocks such as oil, AI demand and weather add to costs. Domestic demand can influence how readily those costs can be passed on and how far they spread.

The RBA's attention to global forces extends beyond inflation. The October 2026 Financial Stability Review stated: "The principal risks are increasingly coming from abroad." Its overall assessment was that "the Australian financial system remains resilient, but there's no room for complacency."

For monetary policy, the challenge is that the RBA cannot influence oil markets, global AI investment or the weather. What it can influence is domestic demand and, through its actions and communication, inflation expectations. The Governor told senators that short-term inflation expectations are elevated.

The Monetary Policy Board lifted the cash rate target by 25 basis points to 4.60 per cent in September, effective 30 September 2026. It was the Board's fourth increase in 2026, bringing the cumulative rise to 100 basis points. The Board said it would be "attentive to the data and the evolving assessment of the outlook and risks", including "increasing the cash rate target further if needed".

The next decision, accompanied by a new Statement on Monetary Policy with updated forecasts, is due on 3 November 2026 at 2.30 pm AEDT. It has not yet been made.

The bottom line

Governor Bullock's list of global cost pressures, the Middle East conflict and its effect on oil, AI-related demand, and extreme weather, shows that the RBA sees Australian inflation being pushed from several directions at once. Oil's effect is the most visible in the data, with fuel up 23.6 per cent over the year.

But the RBA has been equally clear that domestic capacity pressures remain central. For readers trying to understand the inflation debate, it is worth knowing that the Bank sees global shocks and local demand as working together, not as alternative explanations.