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Energy Supply Shocks Up-End Australia's Outlook for Lower Inflation, RBA Says

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Australia's headline inflation is expected to peak at a much higher than expected 4.8% in the quarter to June due to energy supply shocks resulting from the Middle East conflict, according to the Reserve Bank of Australia.

In a prepared speech on Tuesday, Assistant Governor (Economic) Sarah Hunter said inflation in the country was already above target before the start of the Iran war on Feb. 28, with a range of indicators indicating tighter conditions in early 2026.

"Prior to the conflict, growth in activity was expected to slow over 2026 and remain subdued in 2027, reflecting tighter financial conditions and the waning boost from factors that have supported growth recently. All else being equal, this easing in capacity pressures was expected to help bring inflation back down towards target," Hunter said.

However, the external shock from the Middle East conflict has disrupting global oil and natural gas markets and is expected to result in higher inflation in Australia and elsewhere, she said.

The RBA has raised its underlying inflation forecasts for the near term, with the spike in oil prices expected to put upward pressure on inflation over the next year, accounting for about 0.4 percentage points to underlying inflation in the March quarter in 2027.

Underlying inflation is then expected to ease, while headline inflation falls due to a decline in oil and travel prices, Hunter said.

The RBA's base case assumes that the Middle East crisis will be resolved soon, causing a retreat in oil prices.

Among the risks to these assumptions are prolonged higher oil prices and broader, more persistent supply disruption, with higher fuel prices having the potential to lift and embed higher inflation expectations, Hunter said.

"Higher oil prices mean higher costs and higher consumer prices in the near term - that is a given. But this shock has come against a backdrop of elevated capacity constraints and domestic cost pressures," she said.

"Given these starting conditions, our research suggests pass-through will be faster and more extensive, and the risk of inflation expectations drifting higher is elevated."

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