Key Highlights

  • The RBA's assumed oil price for the December quarter is 35% higher than in August.
  • The energy assumption has its greatest effect on headline rather than trimmed mean inflation.
  • Trimmed mean Inflation was 3.7% over the year to the September quarter.
  • The oil assumption will be revisited as prices move.

A single change to the Reserve Bank's oil price assumption goes a long way towards explaining why its November inflation forecasts look so different from those published three months earlier.

Economic forecasts are built on assumptions, and few assumptions move the numbers as much as the price of oil. In the November 2026 Statement on Monetary Policy (SMP), the Reserve Bank of Australia (RBA) disclosed that "The assumed oil price in the December quarter is 35 per cent higher than assumed in August". Further out, it noted oil is "assumed to be 11 per cent higher by end-2028 than assumed in August."

Those two sentences help decode much of the revision to the RBA's outlook.

Why oil matters so much for headline inflation

Headline Consumer Price Index (CPI) inflation measures the change in prices across a broad basket of goods and services that households buy. Fuel is one of the items in that basket, so when oil prices rise, the effect on the headline measure can be fast and visible.

That is why the clearest fingerprint of the oil assumption appears in the near-term headline forecasts. Compare the November and August projections for headline CPI inflation (year-ended, August in brackets):

  • December 2026: 4.5 per cent (3.6)
  • June 2027: 3.7 per cent (2.8)
  • December 2027: 2.7 per cent (2.6)
  • June 2028: 2.5 per cent (2.4)
  • December 2028: 2.4 per cent (2.4)

The revisions are large in the first two periods, then shrink sharply. By December 2028, the headline forecast is identical to the August figure. That pattern lines up with the oil assumption itself: a 35 per cent gap in the December quarter narrowing to 11 per cent by the end of 2028.

The Outlook chapter states that "Headline inflation is expected to peak at 4.5 per cent in the December 2026 quarter". The latest quarterly reading, according to the Overview, was 3.9 per cent over the year to the September quarter.

Where the oil effect is smaller

If oil were the whole story, underlying inflation would be expected to move far less than headline inflation. To an extent, that is what the forecasts show.

The trimmed mean, which removes the largest price rises and falls in each period to give a sense of underlying inflation, is forecast at:

  • December 2026: 3.6 per cent (3.3)
  • June 2027: 3.5 per cent (3.0)
  • December 2027: 2.9 per cent (2.6)

The upward revisions are real, but more modest than for headline inflation in December 2026. The trimmed mean was 3.7 per cent over the year to the September quarter, according to the Overview, and it does not show the spike that the headline measure does.

This distinction matters. Headline inflation can rise sharply on an energy shock and later fall back as that shock passes. Underlying inflation is more about the broad, persistent pace of price increases. The SMP Overview notes that both measures "are now expected to remain above 3 per cent until end-2027", which suggests the RBA sees more than a temporary fuel spike at work.

The Governor's careful distinction

At her media conference on 3 November, Governor Michele Bullock drew a clear line between the oil price and the Board's decision to lift the cash rate target by 25 basis points to 4.85 per cent.

"we are not tightening monetary policy because of the direct impact of oil prices on inflation," she said. "Monetary policy cannot impact global oil prices."

Instead, the concern is about second-round effects. "It is critical that we stop expectations for high inflation from becoming embedded in price-setting decisions," the Governor said. In other words, the risk is that a period of high fuel prices persuades businesses and workers that high inflation is normal, and that belief becomes self-reinforcing.

Deputy Governor Andrew Hauser touched on the same channel in his 5 November lecture, citing a Macquarie University Business survey which found that firms expecting a faster return to target planned to pass on less of their Middle East conflict-related costs. That finding suggests the way businesses respond to an energy shock depends partly on what they expect the RBA to achieve.

Knock-on effects through the forecasts

Higher energy costs do not only show up in prices. In the November forecasts, GDP growth has been revised down later in the horizon, to 1.3 per cent over the year to December 2027 compared with 1.6 per cent in August, and Unemployment has been revised up, reaching 5.1 per cent by December 2028 compared with 4.8 per cent previously.

The forecasts also depend on other assumptions. The cash rate assumption, taken from market pricing as at 28 October, has the rate rising "by 35 basis points by mid-2027, before declining a little to stabilise at 4.8 per cent in 2028." The trade-weighted index (TWI) of the Australian dollar is assumed at 65.2 for 2026. On 11 November the TWI stood at 63.8, according to the RBA website, slightly below that assumption.

What to watch as the assumption is tested

Because the oil assumption is just that, it will be revisited as prices move. The main items to watch are:

  • The October monthly CPI indicator on 25 November, the next update after the 4.3 per cent annual headline figure for the September month
  • The minutes of the November Monetary Policy Board meeting on 17 November, which may shed more light on how the Board weighed energy against other factors
  • The next cash rate decision at 2.30 pm on 8 December

The bottom line

A 35 per cent upward revision to the assumed oil price for the December quarter goes a long way towards explaining why the RBA now forecasts headline inflation to peak at 4.5 per cent, rather than the 3.6 per cent it expected in August. The effect fades over time, which is why the 2028 forecasts look much as they did before. But the Governor has made clear that the Board's concern is not oil itself, which monetary policy cannot influence. It is the risk that an energy shock becomes embedded in broader inflation expectations.