Inflation is surging in Australia

Inflation keeps climbing in Australia, cementing the case for another interest rate hike.

The Australian Bureau of Statistics (ABS) released its latest consumer price index (CPI) for the 12 months ending in March on Wednesday, revealing that both headline inflation and trimmed mean remain heightened.

Headline CPI surged to 4.6%, up from 3.7% in the year leading up to February. Meanwhile, trimmed mean inflation — which measures underlying inflation by stripping out goods with volatile prices changes and what many economists consider a better indicator of inflationary pressures — remained unchanged from February at 3.3%.

Still, inflationary pressures remain well above the Reserve Bank of Australia’s (RBA) target range of 2% to 3%.

The biggest contributors to inflation included housing, up 6.5%, year-over-year, cooling slightly from 7.2% in the year to February. New dwelling prices climbed 4.5%, up from 3.7%, as labour and material costs increased. Rents were up 3.7%, thanks to low vacancy rates across capital cities.

Fuel prices were another major pressure point, surging 24.2% in the year leading up to March, or up 32.8% in March, month-over-month — the highest monthly increase since 2017. Insurance prices increased 3.7%.

The data tilts the RBA toward a May rate hike.

“Fuel clearly has an impact,” Madeline Dunk, an economist at ANZ, told Australian Broker. “One of the questions [moving forward] is around the extent that that flows through into second round effects. And there’s still quite a bit of uncertainty around the extent that we’ll see that come through. That won’t really show up that much in the quarterly data for Q1. But in Q2 it will.

“And we’ve got inflation peaking at around 5% in Q2,” she continued. “That’s reflecting in many ways those higher oil prices, and also businesses having to pass on higher costs because the cost of diesel, for example, and petrol has gone up.”

The RBA has already lifted the benchmark interest rate twice in 2026, pushing the official cash rate (OCR) to 4.10%. And the bank has been clear: there will be no easing of monetary policy until inflation is back within the band.

The conflict in the Middle East, which began in March, has only added fuel to the fire, driving up oil prices and keeping inflation elevated.

Markets are bracing for more tightening. Lenders are already lifting fixed mortgage rates, a classic signal that borrowing costs are heading north. A May cut was never on the cards, but hopes for a pause have all but been wiped out by the latest CPI print.

Adding even more pressure to markets, National Australia Bank (NAB) recently warned that arrears are likely to rise as inflation bites, heightening concern across lenders and brokers.

All four of Australia’s Big Four banks are forecasting a 25 basis point increase during the central bank’s May meeting, which would bring the benchmark rate to 4.35%.

Belinda Allen, head of Australian economics at CBA, said while the bank still expects the RBA to raise rates at its upcoming meeting, it’s “not guaranteed.” She noted that although inflation remains elevated, it came in below market expectations. At the same time, consumer sentiment has recently improved, suggesting Australians are feeling more confident about the economy despite ongoing global uncertainty.

“Over the past eight weeks [since the last RBA meeting] the war has created significant uncertainty for the path of growth and inflation,” Allen said. “All outcomes for the conflict are still on the table: escalation, impasse and peace. All with widely different outcomes, making forecasting and policy setting extremely difficult.”

If rates do rise, borrowing power will shrink again, intensifying pressure on mortgage holders already squeezed by higher living costs and a tight housing market.

“Our view is that the property market is going to slow quite a bit,” Dunk said. “If you look at Sydney and Melbourne, we actually haven’t seen prices grow since October of last year. So I think that the market’s clearly slowing in response to rates.”

The RBA’s next meeting on monetary policy is scheduled for the 4 and 5 of May.

From AustralianBroker