A short warning from Governor Michele Bullock about how long oil supply disruptions might persist helps explain why the RBA raised rates and kept the door open to more.

"Oil prices have risen significantly. Disruptions to oil supply could last longer than anticipated."

Governor Michele Bullock's two sentences at her media conference on 29 September 2026 were not the headline of the day. That belonged to the Monetary Policy Board's unanimous decision to lift the cash rate target by 25 basis points to 4.60%. But the warning about oil captures something central to the Board's thinking: the risk is not just that oil is expensive, but that it may stay expensive for longer than planned.

The Board's statement made the same point in its own words: "global oil supply disruptions are maintaining upward pressure". Combined with forward guidance that the Board will do what is necessary, "including increasing the cash rate target further if needed", it adds up to what market watchers would call a hawkish stance – one that leans towards tighter policy rather than looser.

Why duration is the key word

To a central bank, the difference between a brief oil price spike and a prolonged one is enormous.

A short-lived spike raises the price level – petrol costs more for a while – but if prices then stabilise or fall back, the effect on annual inflation washes out over time. That is why central banks sometimes "look through" temporary supply shocks. Raising interest rates cannot pump more oil, and by the time higher rates take effect, a brief spike may already have passed.

A disruption that persists is different. It gives higher energy costs time to work their way through the economy and into the prices of goods and services that have little obvious connection to oil. It also gives households and businesses time to adjust their expectations. The longer the shock lasts, the greater the chance that a one-off price increase turns into ongoing inflation.

The Governor's warning that disruptions "could last longer than anticipated" is therefore a warning about exactly the scenario central banks find hardest to look through. It also matters that the shock arrived when inflation was already above target: the Board said "inflation remains elevated", leaving less room to wait and see.

How oil works its way into prices

Oil's influence on inflation operates in layers.

  • First-round effects: fuel prices rise directly, lifting transport costs for households and businesses. These show up quickly in headline inflation.
  • Indirect effects: businesses that rely on fuel or petroleum-based inputs – freight, airlines, agriculture, manufacturing, plastics – face higher costs and may raise their prices.
  • Second-round effects: if workers seek higher wages to compensate for rising living costs, and businesses raise prices further to cover those wages, the initial shock can become self-reinforcing.

The Board's statement suggests the first two layers are already in play. It said "Firms are experiencing cost pressures" and are increasing or planning to increase prices. The Governor added: "Businesses in our liaison program continue to expect strong increases in their costs."

On the third layer, the Governor offered some reassurance: "There is no wage price spiral going on in Australia." But the Board's concern about expectations remains. It said high inflation must not become "embedded", and the Governor said: "It's critical that we stop expectations for high inflation from becoming embedded."

Headline versus underlying: where oil shows up

Oil affects the two main inflation measures differently, which is worth understanding when reading the data.

Headline inflation includes everything in the consumer price basket, including fuel. It was 4.0% over the year to August on the monthly CPI indicator. In the June quarter, headline inflation was 3.9% over the year.

The trimmed mean, a measure of underlying inflation, removes the items with the largest price rises and falls in each period. That means a sharp jump in fuel prices may be partly trimmed out. Trimmed mean inflation was 3.6% over the year to the June quarter, and the Governor said underlying inflation has "been about 3.5 per cent for the past six months".

If oil's effects remain confined to fuel, they will mainly show up in headline inflation. If they spread through freight, business costs and pricing decisions across many categories, they will increasingly show up in underlying measures too – which is the outcome the RBA most wants to avoid. Both measures are currently above the 2–3% target.

Why the forecasts are already dated

The August Statement on Monetary Policy, published on 11 August 2026, was prepared when the cash rate was 4.35%, before the September increase. It forecast trimmed mean inflation reaching the 2.5% midpoint by early 2028, while expecting both headline and trimmed mean inflation to "remain elevated in the near term".

Since then, the Board says global energy prices are "now much higher" than at the time of those forecasts, and the Middle East conflict has "broadened". The Governor's overall assessment: "Inflationary pressures will persist for longer than previously expected."

The statement also flagged "heightened uncertainties", with the conflict "unresolved" and scenarios in which inflation could be higher and activity lower than forecast. A prolonged oil disruption is precisely the kind of development that could push outcomes towards that less favourable scenario.

For those tracking the outlook, questions worth considering include:

  • Are oil supply disruptions easing, persisting or intensifying?
  • Is the effect of higher fuel costs spreading into non-fuel prices?
  • Are business cost expectations, as reported through RBA liaison, starting to moderate?
  • What will the 28 October CPI release show about the gap between headline and underlying inflation?

The bottom line

The RBA's September increase was not simply a reaction to higher oil prices; it was a response to the risk that those prices stay high long enough to become embedded in broader inflation. Governor Bullock's warning that oil supply disruptions "could last longer than anticipated" goes to the heart of that risk. The Board has signalled it is prepared to raise rates again if needed, and the persistence of the oil shock will be one of the key questions as it approaches its next decision at 2:30 pm AEDT on Tuesday 3 November 2026.