Key Highlights

  • Second-round effects occur when an energy shock stops being a single CPI line and starts influencing prices, and potentially expectations, more broadly.
  • The Board said higher fuel costs are spreading to other goods and services.
  • RBA staff judged that the underlying Inflation surprise owed more to domestic capacity pressures than to Middle East cost pass-through.

A jump in fuel prices is a one-off hit at the bowser until it starts leaking into the price of everything else, and that leakage is one of the risks the Reserve Bank of Australia (RBA) flagged when it lifted the cash rate to 4.60%.

Economists usually split an energy price shock into two stages. The first-round effect is the direct one: motorists pay more to Fill the tank, and the fuel component of the Consumer Price Index (CPI) rises. The second round is slower and harder to see. Businesses that rely on transport, freight or energy face higher running costs, and some of them pass those costs on in what they charge. If households and firms then come to expect higher inflation and set prices and wages with that in mind, a temporary shock can turn into something more persistent.

That general framework helps make sense of the RBA Monetary Policy Board's statement after its 28–29 September 2026 meeting. In explaining why it raised the cash rate target by 25 basis points, from 4.35% to 4.60% effective 30 September, the Board pointed to higher fuel costs spreading to other goods and services (a paraphrase of the statement, not a direct quote). The decision was unanimous and was the fourth increase of 2026.

From the bowser to the price tag

The Board's statement said "some of the upside risks flagged in August are materialising." According to the statement, those risks included a broader Middle East conflict, higher global energy prices and AI-related Demand pushing up the prices of technology goods.

The minutes of the meeting, published on 13 October, add a number to the fuel part of the story: domestic petrol and diesel prices were 13% higher than forecast in August. At her media conference on 29 September, Governor Michele Bullock pointed to the possibility that the energy shock may not fade quickly: "Disruptions to oil Supply could last longer than anticipated".

For context, the August Statement on Monetary Policy (SMP), whose forecasts were finalised on 5 August and therefore before the September rate rise, assumed a Brent Crude oil price of US$94.9 a barrel for the June quarter of 2026, easing to US$81.2 by December 2026 and US$75.9 by June 2027. The longer fuel prices stay above the levels assumed in forecasts, the more time there is for higher costs to work their way through supply chains and into the prices consumers see.

Why services prices are worth watching

In principle, second-round effects show up wherever fuel and energy are inputs rather than the final product, which is why services prices are often watched for signs of spread. The minutes record that the July monthly CPI was stronger than expected, particularly for market services.

There is an important nuance here, though. RBA staff judged that the surprise in underlying inflation more likely reflected domestic capacity pressures than cost pass-through from the Middle East conflict. In other words, staff did not put the stronger underlying result mainly down to fuel. Bullock made a similar point at her media conference: "Inflation is too high and has been driven by domestic capacity pressures."

The two explanations are not necessarily in competition. Generally speaking, when demand is pressing against what an economy can supply, businesses may find it easier to pass higher input costs on to customers without losing sales. The Board's statement noted that capacity pressures remain. Higher fuel costs arriving in an economy that is already running hot is the kind of combination that can make second-round effects more likely to take hold.

Expectations: the channel central banks fear most

The most persistent version of a second-round effect works through expectations. If people expect prices to keep rising quickly, they may build that into what they charge, what they ask to be paid and how they plan their spending. According to the Board's statement, short-term inflation expectations are elevated.

Bullock framed the September rise partly in those terms. The increase was intended, she said, to "stop expectations for high inflation from becoming embedded in price-setting decisions across the economy". The minutes say recent developments "pointed to an increase in the risk of persistently elevated inflation."

One classic route for second-round effects is wages chasing prices upward. On that front, the Governor was clear: "there is no wage price spiral going on in Australia." She also noted that many workers are going backwards: "They're seeing real wage cuts." The minutes say unit labour cost growth is above the level consistent with the inflation target, but attribute that mainly to weak productivity rather than strong wages. The concern, then, is less about a wage spiral and more about price-setting across the economy.

Two lenses: headline and underlying inflation

Distinguishing between the two main inflation measures helps show where first-round and second-round effects tend to appear.

  • Headline CPI was 4.0% over the year to August 2026, according to the monthly CPI. It includes fuel directly, so a jump in petrol and diesel prices shows up here straight away.
  • Underlying inflation, measured by the trimmed mean, was 3.6% over the year to the June quarter of 2026, with a 0.8% rise in the June quarter itself (seasonally adjusted). Because the trimmed mean sets aside the most extreme price movements in each period, it is less affected by one-off swings.

Bullock said underlying inflation had been running at "about 3.5 per cent for the past six months", which she described as "a percentage point above our target". The RBA's target is 2–3%, with the aim of reaching the 2.5% midpoint.

Broadly, a fuel shock on its own lifts headline inflation first. If underlying measures also stay high or rise, that can suggest price pressures are broader than a single item, which is why the spread from fuel into other goods and services matters so much to the Board.

The bottom line

Second-round effects are the point at which an energy shock stops being a single line on the CPI and starts influencing prices, and potentially expectations, more broadly. The Board has said higher fuel costs are spreading to other goods and services, while its staff judged that the underlying inflation surprise owed more to domestic capacity pressures than to Middle East cost pass-through.

The Governor has declined to signal what comes next. "I'm not going to give you forward guidance," she said, while adding: "The Board will increase interest rates again if that's what's needed to get inflation down." The September CPI is scheduled for release on 28 October, and the next cash rate decision is scheduled for 2.30 pm on 3 November.