Higher costs for housing, transport and food in March have set the stage for interest rates to rise once again next week, with inflation jumping to a near three-year high.
Data published by the Australian Bureau of Statistics on Wednesday shows the Consumer Price Index (CPI) rose to 4.6% for the 12 months to March, up from 3.7% in February.
Inflation is now significantly outside the Reserve Bank’s 2-3% target range, firming predictions for a third consecutive rate hike next week.
It's the first inflation data to capture the effect of the conflict in Iran - which sparked what has become the biggest energy shock in history - escalating fuel prices and, in turn, costs across all parts of the economy.
Though inflation is slightly lower than what economists had predicted, housing, transport and food costs weighed most heavily, up 6.5%, 8.9% and 3.1% respectively.
ABS head of price statistics Sue-Ellen Luke said fuel costs soared 32.8% during the month of March, the highest rise on record.
“Annual CPI inflation is the highest it’s been since September 2023," she said.
While headline inflation may have jumped significantly, trimmed mean inflation - which strips out volatile price movements of items like food and fuel - held steady at 3.3% over the year to March.
Despite stable trimmed mean inflation, REA Group senior economist Anne Flaherty said the figures still increase the chances the Reserve Bank hikes the cash rate to 4.35% in May, with volatility and economic 'stagflation' still a risk.
“This would fully reverse the three interest rate cuts seen in 2025,” she said.
The Reserve Bank of Australia is looking to established whether inflationary threats are long term. Picture: Hu Jingchen/Xinhua/Getty Images
HSBC chief executive Paul Bloxham said whether a further rate hike beyond the May decision is required will depend on how quickly economic activity and the jobs market weaken.
"If the sharp fall in business and consumer sentiment that occurred in the latest readings is a good guide, then the economy is weakening quickly and we expect this to prevent the RBA from lifting rates beyond a cash rate of 4.35%," Mr Bloxham said.
"However, if activity and the jobs market prove to be more robust than we expect, the RBA could lift its cash rate even further."
The latest Westpac consumer sentiment survey fell sharply in April as households brace for rising costs and a hit to their finances in the months ahead.
Forecasting slump
The RBA's most recent economic forecasts were made in February before the conflict began and will updated next week.
Australia’s access to oil remains largely at the mercy of the Iran-United States chokehold on the Strait of Hormuz, the narrow waterway between Iran and Oman.
Around 30% of Australia’s oil generally passes through the passage, which the US attempted to blockade in mid-April with the aim of intercepting Iranian-linked vessels.
Aussies have been feeling some relief from the government’s fuel excise in April, which has absorbed some of the elevated energy costs.
The Strait of Hormuz. Picture: Getty
Spending at petrol stations has eased below its recent peak according to spending data by the Commonwealth Bank, and is around 0.3 percentage points higher than the 2025 average.
However, fuel price adjusted spending at petrol stations has returned to normal levels in more promising sign for April inflation figures next month.
Rate hikes ahead?
According to its most recent forecasts, the RBA is expecting inflation to hit its peak in June coinciding with the end of the government’s fuel excise, as soaring prices flow through to everything that forms part of everyday spending.
The bank has already delivered two rate hikes this year, with markets pricing in at least one more increase by the end of the year.
All four big banks expect at least one more rate hike, with Westpac retaining the most hawkish view of the four, predicting three more rate hikes in May, June and August.
Borrowers can expect an increase to minimum mortgage repayments to kick in as soon as late May if the cash rate increases again next week.
Repayments on a $750,000 home loan would jump by around $120 per month, almost $1500 a year, according to Mortgage Choice.
The RBA will make its next call on the cash rate on 5 May.
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