A wider conflict in the Middle East and a worldwide rush into artificial intelligence are pushing on Australian prices from different directions, yet the RBA still sees home-grown pressure as the bigger problem.

Two stories that rarely share a headline ended up side by side in the RBA's September rate decision. One is an old-fashioned energy shock: conflict in the Middle East, dearer oil and higher fuel bills. The other is thoroughly modern: a global investment boom in artificial intelligence that is lifting demand for, and the prices of, the hardware that powers it.

When the Monetary Policy Board raised the cash rate target by 25 basis points to 4.60 per cent on 29 September, its statement said some of the upside risks it had flagged in August were materialising. It named a broader Middle East conflict, higher global energy prices and AI-related demand pushing up technology goods prices. Understanding how each force works, and why the Board did not treat either as the main cause of high inflation, helps explain the decision.

The energy shock: a wider conflict and dearer fuel

Governor Michele Bullock was direct about the energy side at her media conference on 29 September. "The conflict in the Middle East has escalated again in recent weeks, and oil prices have risen significantly," she said. She also flagged the risk that the shock would not fade quickly: "Disruptions to oil supply could last longer than anticipated".

The minutes of the meeting put numbers to the surprise. Domestic petrol and diesel prices were 13 per cent higher than had been forecast in August, and global energy prices were significantly above the assumptions used in the August Statement on Monetary Policy.

Bullock did not soften the consequences: "it's made us all poorer in this country. That is a fact." She added that "fuel prices, fertiliser prices, transport prices, all these things now are permanently higher."

An energy shock tends to spread through an economy in layers. Its path typically runs through:

  • Direct costs: petrol and diesel at the bowser, which show up quickly in headline CPI.
  • Business inputs: freight, farming and manufacturing, where fuel and fertiliser are significant costs.
  • Second-round effects: the risk that businesses and workers build higher costs into future prices and wage claims.

It is that last layer that typically concerns central banks most, because it can turn a one-off jump in the price level into persistent inflation.

The AI boom: more demand, dearer components

The second force works through both supply chains and spending. Bullock said "the global AI investment boom has driven significant price rises for some inputs". According to the minutes, the AI boom drove strong growth in Asian trading partners and pushed up the prices of key components in the AI supply chain.

The effect is not confined to imported technology goods. Bullock also pointed to demand at home: "The AI boom is also adding to demand in the Australian economy at a time when we already have capacity pressures."

It also lands on an economy that has not slowed as much as expected. The Board's statement noted that output growth had slowed but was stronger than expected in the June quarter, while consumer spending was easing only gradually.

That combination matters. A supply-driven price rise in imported components is one thing; extra demand landing on an economy that is already running close to its limits is another, because it adds to the very pressures the RBA is trying to cool.

Why the RBA still points to pressure at home

Despite the attention on oil and AI, the Board's reading of inflation was largely domestic. July inflation data were stronger than expected, particularly for market services, and staff judged that the upside surprise more likely reflected domestic capacity pressures than pass-through of Middle East cost shocks.

Bullock made the same point in her own words: "Inflation is too high and has been driven by domestic capacity pressures." She tied those pressures partly to weak productivity, saying "Productivity growth remains weak and the labour market remains a little tight," and, more bluntly, "The bottom line is that productivity is doing nothing."

This distinction shapes the policy response. Higher interest rates cannot lower the global price of oil or of AI chips. But they can influence demand at home and, through the currency, the local price of imports. As Bullock put it: "And raising interest rates impacts import prices." She added: "And then according to our research, in fact, the most important channel is the exchange rate channel."

The Board's statement framed the concern in terms of persistence: "The Board remains focused on ensuring that high inflation does not become embedded." In practice, the risk with two overlapping global shocks is that they arrive while domestic inflation is already above target, making it more likely that higher prices feed into expectations.

A shared global backdrop

Australia is not facing these forces alone. The minutes noted that several central banks abroad had already raised interest rates, and that markets expected tightening in most major advanced economies over 2026–27. Global bond yields rose notably, mainly reflecting higher real yields, while long-term inflation expectations remained broadly stable.

The currency offers a partial offset. The minutes noted that the Australian dollar had depreciated a little in trade-weighted terms since the previous meeting but was around 5 per cent higher since the start of the year. In general, a stronger currency lowers the local cost of imported goods, all else equal, although it cannot fully cancel out a large rise in global energy or component prices.

Bullock acknowledged the cost of the response for borrowers. "Now, I know this decision is difficult for households with a mortgage and businesses with loans," she said, while arguing that "high inflation hurts all Australians, especially the most vulnerable."

The bottom line

Higher oil prices and the AI investment boom are both adding to Australian prices, through fuel, freight, fertiliser and technology inputs, and through extra demand. But the RBA's September assessment was that domestic capacity pressures, rather than imported cost shocks, were the main driver of the recent upside surprise. That is why the Board chose to tighten even though it cannot control global energy or technology markets. The Board has said it will be guided by the data, and readers trying to understand what this means for their own finances may wish to seek licensed professional advice.