Key Highlights

The Governor said the Middle East conflict has re-escalated and global energy prices are much higher than assumed in August.

Automotive fuel rose 23.6 per cent over the year to September, with broader cost pressures still working through.

Short-term inflation expectations are elevated, which the RBA is watching closely.

The Reserve Bank has linked a renewed escalation of the Middle East conflict to higher global energy prices, and the September 2026 inflation data show the effect at Australian petrol stations.

How does a conflict thousands of kilometres away end up in the weekly budget of an Australian household? The short answer, according to the Reserve Bank of Australia (RBA) and the latest official figures, is through energy.

In her opening statement to the Senate Economics Legislation Committee on 28 October 2026, Governor Michele Bullock told senators that the Middle East conflict has re-escalated. She listed global cost pressures linked to that conflict among the drivers of Australia's current inflation, alongside AI-related demand and extreme weather.

On the same day, the Australian Bureau of Statistics (ABS) released its Consumer Price Index (CPI) for September 2026. Headline inflation rose 4.3 per cent over the year, up from 4.0 per cent in August, and one of the largest movers was automotive fuel.

The chain begins in world energy markets. The RBA's Monetary Policy Board flagged the issue in its decision statement of 29 September 2026, noting that "global energy prices are now much higher than had been assumed in the August forecasts."

Governor Bullock repeated that observation to senators a month later and drew out its implication: "Inflation will therefore likely be higher than was our base case in August."

That matters because the RBA's August Statement on Monetary Policy had projected inflation returning to the midpoint of the 2–3 per cent target range only in late 2027, with risks skewed to the upside. A jump in energy costs beyond what was assumed in those forecasts adds to the upside risk the Bank had already identified.

From world oil to the petrol bowser

The most direct link between world oil prices and Australian households is fuel. According to the ABS, automotive fuel prices rose 23.6 per cent over the 12 months to September 2026. In the month of September alone, they rose 9.4 per cent. The ABS attributed the increase to higher world oil prices.

Those moves pushed up the broader Transport group, which rose 8.7 per cent over the year. They also help explain the gap between the headline CPI and measures that strip out the most volatile items. The CPI excluding fruit and vegetables and automotive fuel rose 3.7 per cent annually, while the trimmed mean measure of underlying inflation was 3.6 per cent.

In the month of September, headline CPI rose 0.8 per cent in original terms and 0.6 per cent seasonally adjusted. The monthly trimmed mean rose a more modest 0.3 per cent seasonally adjusted.

Wider costs

Fuel does not stay in the fuel tank. Businesses that move goods, run machinery or rely on transport face higher operating costs when oil prices rise. Some of those costs may eventually be passed on to customers in the prices of other goods and services.

The RBA has suggested this process is not yet complete. Assistant Governor (Economic) Sarah Hunter, in an interview on 60 Minutes broadcast on 25 October 2026, said that oil-driven price pressure is still coming through and that things will get "a little bit" worse before they improve. She described the RBA as dealing with two challenges at once: an overseas oil shock, and excess domestic demand relative to sustainable supply.

The ABS data show goods prices rising 4.6 per cent over the year and services prices 4.1 per cent. Not all of that is due to the Middle East, but it indicates that price pressure is broad.

Expectations

The final link in the chain is psychological, and it is the one central banks watch most closely. When households and businesses see prices at the bowser climb sharply, they may come to expect higher inflation more generally.

Governor Bullock told senators that short-term inflation expectations are elevated. At her media conference following the September decision, she explained why that is a concern: "It's critical that we stop expectations for high inflation from becoming embedded in price-setting decisions".

A one-off jump in oil prices is something a central bank might, in other circumstances, choose to look through. The risk is that a shock to energy prices becomes a shock to wage and price-setting behaviour across the economy, which is harder to reverse.

Risks from abroad, and the RBA's response

The Middle East is not the only global factor the RBA is monitoring, but it sits within a wider theme. The RBA's October 2026 Financial Stability Review, released on 1 October 2026, stated: "The principal risks are increasingly coming from abroad."

The review nonetheless concluded that "the Australian financial system remains resilient, but there's no room for complacency."

For the Bank's inflation mandate, the challenge is that global shocks combine with domestic pressures. Governor Bullock told senators that "we still see inflation arising from domestic capacity pressures." An external energy shock arriving on top of domestic capacity pressures makes the inflation outlook harder to manage.

The Monetary Policy Board raised the cash rate target by 25 basis points to 4.60 per cent at its September meeting, effective 30 September 2026. It was the fourth increase this year, and the cumulative rise in 2026 has reached 100 basis points. In its statement the Board said: "Inflation remains elevated and some of the upside risks flagged in August are materialising."

Monetary policy cannot lower the world price of oil. What it can do, in the RBA's view, is restrain domestic demand and help keep inflation expectations anchored. Ms Hunter said in her interview: "We know that higher interest rates will bring inflation down".

The Board meets on 2–3 November 2026, with its decision and a new Statement on Monetary Policy due at 2.30 pm AEDT on 3 November. The Board has said its options include "increasing the cash rate target further if needed", but the November decision has not been made, and Ms Hunter declined to signal what it would be.

The bottom line

The RBA has drawn a clear line from the re-escalating Middle East conflict to Australian prices: higher global energy costs, a 23.6 per cent annual rise in automotive fuel, broader cost pressures still working through, and elevated short-term inflation expectations.

For households, the conflict's most visible impact is at the bowser. For the RBA, the greater concern is whether that impact spreads further into the economy. As Governor Bullock told senators on 28 October 2026: "But we can't allow high inflation to persist."