in brief
- Australia had one of the highest consumer price indexes in the world, even before the war in the Middle East.
- Economists predict it will continue to rise due to fuel shortages, even as the central bank raises rates.
The Reserve Bank of Australia has sounded the alarm over the ongoing conflict in the Middle East, warning of “substantial risks” to both the economy and inflation. This comes amid their decision to raise the cash rate this past Tuesday, a move that highlights the precarious economic landscape.
Economists caution that Australia’s consumer price index (CPI), an indicator of the percentage change in prices for various household goods and services, might remain above the bank’s target for the foreseeable future. This persistent inflationary pressure has been a growing concern.
During its March meeting, the bank’s board narrowly voted, by a margin of five to four, to increase the official cash rate from 3.85% to 4.1%. This decision was largely anticipated by banks and financial analysts, reflecting the broader economic anxieties.
The central bank pointed to the risk of “sharply higher fuel prices” as a consequence of the ongoing war, stating that inflation had already reached troubling heights. This was evidenced in the latter half of 2025 when Australia’s CPI hit 3.8%, ranking among the highest globally.
Since the conflict erupted nearly three weeks ago with the United States and Israel attacking Iran, petrol prices have surged by approximately 50 cents per litre across Australia. This spike in fuel costs has prompted the Australian Competition and Consumer Commission (ACCC) to call in major fuel suppliers to justify the soaring prices.
In its latest report, the Organisation for Economic Co-operation and Development (OECD) reported an average CPI of 3.3 per cent in January.
While the OECD average CPI has been dropping, Australia’s has been on the rise, which could put the country at somewhat of an economic disadvantage to comparable global economies.
Economists have told SBS News that Australia’s response to conflicts in the Middle East and Europe plays a part in heightened inflation, warning CPI could increase to almost 5 per cent in the weeks ahead.
What pressures are affecting Australia?
Trent Saunders, a senior economist with CBA, told SBS News that Australia’s economy is healthy overall and has an “incredibly low” unemployment rate.
But there are also headwinds contributing to higher inflation.
“With GDP growth now starting to pick up, what we’re seeing is that we’re starting to hit up against these capacity constraints,” he said.
“And this has started to flow through to higher inflation.”
Other economies, like those of wealthy European nations, have less growth than Australia and lower CPIs.
“They’re not facing the same kind of inflationary pressures that we’ve seen in Australia.”
How does Australia compare to the world?
Australia is tied fifth in the 38-nation OECD group for the highest CPI, looking at the most recent data from the OECD and the Australian Bureau of Statistics (ABS) from January.
The highest was Türkiye at a staggering 30.7 per cent, followed by Colombia and Iceland on 5.4 per cent and 5.2 per cent, respectively.
Professor and economist Warwick McKibbin from the Australian National University explained why Türkiye has such high inflation.
“Their monetary policy is too loose. And as you push more money into the economy, people will spend that money on goods and services, and that drives up their price,” he said.
He said that other countries, including Brazil and Argentina, have had similar issues with inflation.
“If the central bank is not independent, then governments that need money finance it through an inflation tax rather than through regular taxes because they do not have enough revenue,” he said.
While Australia’s CPI is far lower than Türkiye’s, it outstrips comparable economies in the UK, US, France, Germany and Canada.
McKibbin said that Australia’s CPI was higher because the RBA didn’t raise rates as much as other central banks after the COVID-19 pandemic and Russia’s full-scale invasion of Ukraine.
“So those other central banks were a lot more aggressive. They raise interest rates, which is equivalent to reducing the amount of money in the economy, and that slows down demand,” he said.
While the higher CPI isn’t “of much concern”, McKibbin added, it can place Australia at an economic disadvantage globally.
“If you’ve got a higher inflation rate than the rest of the world, then generally the exchange rate would appreciate relative to the rest of the world. And that in itself also adds to the inflation problem because it makes imports more expensive.”
Impacts of the conflict
The Reserve Bank board acknowledged in its decision that the conflict in the Middle East could continue to push up inflation.
“A longer or more severe conflict could put further upward pressure on global energy prices; this will push up near-term inflation and could also increase inflation further out if it impairs supply capacity or price rises get built into longer-term inflation expectations,” it wrote.
Saunders expected the next inflation data to show a “quite large” increase to CPI, which could increase to over 4 per cent, driven by fuel prices.
McKibbin estimated that CPI could climb to as much as 4.8 per cent amid “highly uncertain” fuel supplies.
“If oil can start getting through other places like China or India that could ease pressures, but it’s highly uncertain. We’re seeing estimates inflation could increase by between 0.5 to 1 per cent otherwise.”
For the latest from SBS News, download our app and subscribe to our newsletter.
