Australia’s inflation trajectory ticked up again in March, with a sharp jump in fuel prices caused by the war in Iran pushing headline inflation higher and keeping pressure on the Reserve Bank of Australia ahead of its May meeting.
The Consumer Price Index (CPI) rose 1.1 per cent in the month, lifting annual inflation to 4.6 per cent, the Australian Bureau of Statistics reported. Fuel alone contributed a full percentage point to the monthly increase, with regular unleaded petrol prices surging 33 per cent and diesel prices jumping 41 per cent, the largest monthly rise since fuel price data began being recorded by the ABS in 2017.
Yet while fuel dominated the headline result, measures of underlying inflation, which strip out the most volatile price movements to show how broadly prices are rising across the economy, also remained uncomfortably high in the March quarter.
The trimmed mean inflation figure, the RBA’s preferred gauge of underlying inflation, rose 0.8 per cent in the March quarter and 3.5 per cent over the year, still well above the RBA’s 2 to 3 per cent target band. This measure works by excluding the biggest price rises and falls, providing a clearer picture of inflation pressures across most goods and services.
CBA Senior Economist Trent Saunders said the lower-than-expected trimmed mean (coming in at 0.8 per cent instead of the forecasted 0.9 per cent) largely reflected weaker travel prices, but underlying domestic price pressures remained elevated.
“Market services price growth is still too high, and domestic price pressures remain firm ahead of the full pass through of higher transport and material costs from the war in Iran,” Saunders said.
“The inflation problem has not yet been solved.”
Domestic pressures remain firm
Market services inflation, which tracks prices for services like restaurant meals and car repairs that are closely linked to wages and domestic demand, rose to 3.7 per cent over the year. The RBA watches this closely because it signals inflation generated at home rather than imported from overseas.
Housing costs also continued to rise, with new dwelling prices up 0.5 per cent in the month and rents increasing 0.2 per cent, supported by tight rental markets and low vacancy rates.
While fuel excise relief from April and lower global oil prices are expected to ease fuel‑driven inflation in the June quarter, businesses have already flagged higher transport and materials costs, suggesting broader price pressures may build from here.
May rate hike expected, but not guaranteed
CBA expects the RBA to lift the cash rate by 25 basis points in May to 4.35 per cent, but the decision is likely to be split and finely balanced.
CBA Head of Australian Economics Belinda Allen said the RBA Board faced competing signals, with inflation still too high, but uncertainty as to the impact higher rates and conflict in the Middle East will slow economic activity.
“Inflation remains well above target, the labour market is still tight and cost pass through from the war is occurring faster than usual,” Allen said.
“At the same time, business and consumer sentiment has weakened and cracks are emerging in parts of the housing market, making this another line ball decision.”
After May, CBA expects the RBA to pause as higher rates, elevated energy prices and softer confidence weigh on growth. However, a faster resolution to the war, resilient consumer spending or stronger wage outcomes would increase the risk of further tightening.
