Another jump in inflation sparks fears of more interest rate rises

Australians could face multiple interest rate hikes as the fastest oil price rise in history resulted in a surge in inflation, with warnings that is only the “tip of the iceberg”.

Official figures released by the Australian Bureau of Statistics show the pain motorists have been feeling for months, with headline inflation jumping by 1.1 per cent cent in the March quarter, largely due to surging oil prices.

The Consumer Price Index rose 4.6 per cent in the 12 months to March 2026.

The latest number is Australia’s highest inflation since September 2023 when the nation’s economy was rebounding after Covid-19.

The price of petrol soared 32.8 per cent over the month of March, lifting the cost of transportation by 9.2 per cent in just the last 30 days.

“Before excise cut”: Treasurer

Treasurer Jim Chalmers said Wednesday’s data predated the government’s temporary cut to the fuel excise.

“Since we have halved the fuel excise, after this period we are talking about now and the inflation data, we have seen petrol and diesel prices fall by at least 70 cents in most capital cities,” Mr Chalmers said.

“It shows how important the fuel excise relief is for the next couple of months.

“Our excise cut has been a very important factor in taking some of the sting out of fuel prices and that is reflected in the movement of fuel prices in April.”

More pain on the way, economists

Oxford Economics Australia economist Harry McAuley warned interest rates and inflation would continue to rise.

“Inflation has further to rise. We forecast headline inflation to peak above 5 per cent in Q2 and end the year at 4.7 per cent,” he said.

Mr McAuley warned the current oil price shock is the worst nightmare for the central bank.

“They simultaneously boost prices and crunch demand; a combination that puts the board between a rock and a hard place in achieving its dual mandate of price stability and full employment,” he said.

That tension will likely keep rates on hold at 4.35 per cent for an extended period, with the board opting to keep rates restrictive for longer, rather than pushing ahead with a sharper-but-shorter tightening cycle.”

However, he warned if the Strait of Hormuz remains closed, the RBA would be forced to lift rates multiple times.

“Tip of the iceberg”

Global X senior product and investment strategist Marc Jocum called Wednesday’s figures the tip of the iceberg.

“What we’re seeing is only the visible tip above the surface, but beneath it sits a far larger mass of pressure still building, not yet fully visible in the data, but increasingly hard to ignore in what’s coming next,” he said.

Mr Jocum warned the full impact of the crisis was still unfolding, even though petrol prices had already surged by their largest jump on record.

“As those second-round effects flow through over time, inflation tends to spread more broadly across the economy rather than fade away,” he said.

“The first quarter inflation sets the baseline for where prices begin to track as the Middle East conflict continues, but it’s in the second quarter where the full force and magnitude of those pressures are likely to come through.”

In a brutal blow to households, VanEck head of investment and capital markets Russel Chesler warned prices would rise again in April.

“The full effect of the Iran war and the increase in the oil price continues to feed into the economy,” he said.

“Many suppliers held off increasing prices in March, food prices are expected to continue to increase with rising fuel and fertiliser costs forcing increases in staples like bread, milk and fresh produce.”

Coles has increased its own-brand milk prices by 20 cents a litre after being lobbied by dairy farmers.”

Mr Chesler said the market was currently pricing in three more interest rate hikes, but he has given households some hope, saying he believed this is “overly aggressive.”

“In addition to a May rate hike the market is currently pricing in two additional rate hikes this year, which would take the RBA cash rate to 4.85 per cent,” he said.

“The RBA faces a difficult balancing act, containing inflation without placing excessive strain on an already stretched consumer and tipping the economy into recession.”

What the RBA looks at

Meanwhile, the all-important trimmed mean inflation – which the Reserve Bank uses as it strips out seasonality and volatility came in at3.3 per cent over the last three months orunchanged over the 12 months until March.

This is still above the central bank’s target rate of the midpoint between 2 and 3 per cent.

Prior to Wednesday’s release, economists had predicted the trimmed mean inflation rate would rise by 0.9 per cent over the quarter, in line with the Reserve Bank’s forecast.

The market is putting an almost 80 per cent chance the central bank raises the cash rate 25 basis points next week, which would be the third consecutive hike this year.

Why RBA may pause rate hike

Deloitte Access Economics partner Stephen Smith said the RBA could pause their interest rate hiking cycle as they await the fallout from the Middle East conflict.

“Waiting another month may provide a clearer picture of how broader prices across the economy are being affected by the fuel shock,” he said.

“If there was one reason for the RBA to stay its hand at its monetary policy board meeting next week, that would be it.”

He said there were early warning signs that the conflict was weighing on spending, pointing to consumer confidence which was at a four decade low.

“This will help take the heat out of inflation,” he says.

“The Reserve Bank of Australia must carefully weigh its dual mandate of inflation and employment.”

At the same time, Mr Smith noted Australia’s inflation rate was simply too high, even prior to the conflict beginning.

Deloitte also said the upcoming federal budget would play a crucial role in removing some of the inflationary pressures.

“The Treasurer has signalled lower spending, which will shape the economic and inflation outlook,” he said.

“While a rate hike in May is likely, it could be prudent for the RBA to understand the fiscal path before setting the direction of monetary policy.”

These are in line with comments from financial commentator and Compare the Market economics director David Koch who believes the central bank will hold interest rates while the consider the impact of the government’s budget on May 12.

“(The RBA will) be thinking about whether oil prices will stay high for longer because if the Middle East crisis resolves itself, oil prices will drop significantly – and that would take a big chunk out of the inflation rate,” Mr Koch said.

“The other thing they’ll be thinking about is Australian households. Consumer confidence has plunged and business confidence has fallen to almost record lows. Consumers cutting their spending is bad for the economy because small businesses start to suffer.

“And bosses not having confidence is bad for the economy too because they won’t invest and they won’t hire people, so the Reserve Bank doesn’t want to crush consumers and businesses with another interest rate increase.”

More to come