A 33% surge in fuel prices following the Middle East conflict sent headline inflation in Australia to its highest since 2023 in March. Although an even larger increase in inflation was expected by markets, the report keeps the RBA on track to continue its hiking cycle next week. Annual headline CPI increased from 3.7% to 4.6%, while quarterly trimmed mean inflation - the gauge the RBA uses to assess underlying inflation trends - was 0.8% in the March quarter and 3.5% over the year, up from 3.4% previously.
Headline CPI rose by 1.1% month-on-month in March and 1.4% across the first quarter. In annual terms, headline inflation was 4.6% in the monthly series but a slightly lower 4.1% in the quarterly figures.
Fuel prices - which had been falling before the conflict - surged by 32.8% in March, as regular unleaded petrol rose from 171 to 228 cents per litre. Premium unleaded fuel jumped by 30% to 250 cents per litre, while diesel increased by 41% to 256 cents per litre. From April 1, the Federal Government has halved the fuel excise tax for 3 months.
While fuel was the major driver of inflation in March, the chart below shows that housing (yellow bars), food (green bars), and recreation and culture (light blue bars) have all played major roles over the past year in lifting annual inflation from the 2s to the 4s.
Housing inflation reflects higher dwelling construction costs as well as the impact of government energy rebates unwinding, with electricity prices up by around 25% over the year. Meanwhile, food inflation has been boosted by rising input costs associated with dining out at restaurants. Higher prices for domestic travel and media services (subscriptions etc) drove the recreation and culture category.
For the March quarter, trimmed mean CPI rose by 0.8% - a touch below consensus for 0.9% - and firmed from 3.4% to 3.5% at an annual rate, its highest since Q3 2024. The RBA's forecasts from February (due to be updated next week) that were tabled before the conflict had trimmed mean CPI projected to rise to 3.7% by mid-year before easing to 3.2% by year-end.
With core inflation at the top or above its 2-3% target band, the RBA delivered back-to-back 25bps hikes in February and March. The RBA's argument has been that with trimmed mean CPI picking up, excess demand and other capacity pressures in certain sectors (such as home building) are reflected in higher inflation. The RBA through higher rates is attempting to cool that demand, while it regards the fuel price shock as an additional risk to prices more broadly if firms start to pass through that increase to consumers.
