The Reserve Bank says higher oil prices are feeding directly into Australian inflation through the petrol bowser, and the effects reach well beyond what motorists pay to fill up.

Few prices are as visible as the number on the sign at the local service station. When it jumps, households notice immediately, and conversations about the cost of living tend to follow. So does the Reserve Bank of Australia, which has made the latest rise in oil prices one of the threads in its explanation of why inflation remains too high.

"Oil and related prices have increased sharply again and will add directly to inflation," Governor Michele Bullock told the House of Representatives Standing Committee on Economics on 18 September. She went on: "Higher oil prices have increased inflation directly through their impact on petrol prices."

Eleven days later, the Monetary Policy Board raised the cash rate target by 25 basis points to 4.60 per cent. Its statement listed a broader Middle East conflict and higher global energy prices among the upside risks flagged in August that were now materialising.

The direct channel: from barrel to bowser

The most immediate route from oil to inflation is simple. Petrol is part of the basket of goods and services that make up the consumer price index. When crude oil becomes more expensive, refined fuel follows, and the higher pump price shows up in the CPI.

That is why the Governor described the effect as direct. Unlike many other price pressures, it does not have to work its way through wage negotiations or business pricing decisions first. It lands in household budgets, and in the inflation figures, quickly.

This direct effect is most visible in headline inflation, which includes every item in the basket. The monthly CPI indicator showed headline inflation at 4.0 per cent over the year to August. Over the year to the June quarter, headline CPI was 3.9 per cent.

Beyond the bowser: the second wave

Oil is not just something households buy. It is an input into a wide range of other activity, from freight and farming to manufacturing. At her 29 September media conference, Bullock spelled out how widely the shock has spread.

She said that "the Middle East conflict has been a big shock, and it's made us all poorer in this country," adding that "fuel prices, fertiliser prices, transport prices, all these things now are permanently higher."

Those broader cost increases can take longer to appear in consumer prices. A trucking firm facing higher diesel bills, or a farmer paying more for fertiliser, may pass on the cost gradually. This is part of why the RBA watches underlying inflation closely, as it shows whether price pressures are spreading across the economy.

Underlying inflation, measured by the trimmed mean, was 3.6 per cent over the year to the June quarter. Bullock described it on 29 September as "about 3.5 per cent", around a percentage point above the 2.5 per cent midpoint of the 2–3 per cent target range.

Pressure on transport businesses is also visible in the RBA's Financial Stability Review, released on 1 October, which said business insolvencies "remain elevated in some industries, particularly hospitality, construction and transport".

What the forecasts assumed about oil

Central bank forecasts rely on assumptions about oil prices, and the August Statement on Monetary Policy set out its path for Brent crude, in US dollars per barrel:

  • 94.9 for June 2026
  • 81.2 for December 2026
  • 75.9 for June 2027
  • 73.6 for December 2027
  • 72.3 for June 2028
  • 71.3 for December 2028

In other words, the August forecasts assumed oil prices would ease gradually over time. Bullock's later remark that oil and related prices had "increased sharply again" suggests the oil environment has been less benign than that assumption might have implied, consistent with the Board's view that August's upside risks were materialising.

On that path, the August forecasts had headline CPI at 3.6 per cent in December 2026, returning to the 2–3 per cent target range by early 2027. Trimmed mean inflation was forecast at 3.3 per cent in December 2026. These forecasts were prepared with a cash rate assumption of around 4.3–4.5 per cent and pre-date the September hike.

Why a central bank responds to an oil shock

Interest rates cannot bring down the global price of oil. So why does an oil shock factor into the Board's decision?

The concern is less about the first-round effect on petrol prices than about what comes next. If higher fuel costs feed into broader business costs and inflation expectations, elevated inflation can become harder to dislodge. The Board's September statement noted that short-term inflation expectations are high and that firms were raising or planning to raise prices. It said it is focused on preventing high inflation from becoming embedded.

The Governor was also clear that oil is not the whole story. "Inflation is too high and has been driven by domestic capacity pressures," she said. The oil shock is landing on an economy where demand is already pressing against supply, and where weak productivity limits how fast output can grow. The broader geopolitical backdrop is also on the RBA's radar: its October Financial Stability Review listed geopolitical tensions among the elevated threats facing the financial system.

There is one partial offset. Assistant Governor (Financial Markets) Christopher Kent noted on 13 August that "A higher exchange rate helps moderate inflation by lowering the domestic price of imports." He pointed to the Australian dollar appreciating "by around 5 per cent on a trade-weighted basis since the start of the year."

The Board has made no commitment on its next move. "I'm not going to give you forward guidance," Bullock said, while adding that "The Board will increase interest rates again if that's what's needed to get inflation down." The next CPI release is on 28 October, ahead of the decision at 2.30 pm on 3 November.

The bottom line

Oil reaches Australian inflation through two routes. The first is direct and fast: higher crude prices lift petrol prices, which show up straight away in headline CPI. The second is slower and broader, as fuel, fertiliser and transport costs filter through to other goods and services. The RBA cannot control global energy markets, but it is watching closely to ensure a fresh oil surge does not help entrench inflation that, on its underlying measure, is already around a percentage point above the target midpoint.