Housing construction, fruit and vegetables and travel will be the sectors of the economy most exposed to the fuel price shock over the next two years – but while households face prolonged pain, government revenue is likely to benefit from elevated energy and commodity export prices.
Analysis released by the Reserve Bank of Australia shows a 10 per cent increase in domestic fuel prices will raise the overall price level in the economy by 0.2 to 0.25 percentage points over one to two years as firms pass on higher costs to consumers.
Domestic fuel prices have skyrocketed due to the Middle East war, which choked global oil supplies and sent oil prices soaring.
In a separate warning on Thursday, the Australian Food and Grocery Council said a “perfect storm” of global conflict, surging energy costs and domestic economic pressures meant food and grocery suppliers, and manufacturers, could no longer weather soaring production costs alone.
The council’s chief executive, Colm Maguire, said the oil price shock resulted in “a fundamental shift in the cost of doing business”.
“From the fertilisers used on our farms to the fuel in the trucks that transport and the energy powering our factories, every single link in the chain is more expensive,” he said.
According to the council, container freight costs have risen 22 per cent year-on-year to March 2026 and 30 per cent between February and March, amplifying landed costs across imported inputs, including packaging, fertilisers and finished goods.
Meanwhile, wheat prices are up 8 per cent year-on-year and 11 per cent between February and March 2026, and soybean oil prices are up 52 per cent year-on-year, driven by both energy-linked biodiesel demand and supply constraints.
The central bank expects underlying inflation to peak at 3.8 per cent in the June quarter. But if the conflict results in even higher oil prices, the RBA forecasts underlying inflation to remain above the middle of its 2-3 per cent target band in two years.
Speaking at the Women in Economics pre-budget address at the National Press Club on Thursday, Barrenjoey chief economist Jo Masters said the inflation challenge was exacerbated by the government meeting the public’s rising expectations to provide support “right across the spectrum of the things that [they] need and want”.
“Ultimately, that’s part of why we have an inflation problem… we’ve never really allowed the economy to have a downturn through the number of shocks we’ve had in the last five or six years,” she said.
Government spending has reached a near-40-year high as a share of the economy, excluding the COVID-19 pandemic. Economists say this has contributed to Australia’s pre-war inflation resurgence and risks complicating the RBA’s task of bringing inflation back to its 2-3 per cent target.
Treasurer Jim Chalmers is set to announce a one-off “earned income offset” for salaried workers as part of next week’s budget, which adds to other cost-of-living measures already announced, including the halving of the fuel excise and $1 billion in interest-free loans for businesses.
Following the RBA’s move on Tuesday to lift the cash rate by 0.25 percentage points from 4.1 per cent to 4.35 per cent, governor Michele Bullock warned federal and state governments that additional spending risked fuelling inflation.
Despite the caution, Victoria and Western Australia have already unveiled budgets heavy on cost-of-living relief, with Queensland signalling similar measures for its June update.
Turning to the economic impact of the war, Bullock also acknowledged that “it’s not unreasonable for firms if they are seeing their cost basis rise… whether it be fertilisers for farmers or fuel diesel for transport costs.… for them to want to recover their costs”.
The RBA’s accompanying Statement of Monetary Policy showed that outside of travel, the production of fruit, vegetables, and other groceries was the most exposed part of Australia’s economy due to a heavy reliance on diesel.
Australia’s per-capita diesel consumption is one of the highest in the world due to strong demand from the agricultural and mining industries and the heavy use of diesel-powered road freight.
Coupled with the increasing cost of fertilisers – such as urea – the RBA expects “some upward pressure on groceries in the near term”.
Up to 70 per cent of Australia’s urea imports come from the Middle East, and prices are now around 26 per cent higher than before the Strait of Hormuz was effectively shut by the conflict.
The RBA also noted the economic upside that “higher export prices and profits in energy-producing sectors raise government tax revenues”.
But Masters said all of this benefit wouldn’t “immediately flow to the [budget] bottom line”, noting that the strength of the Australian dollar could neutralise some of the benefit of higher commodity prices.
Chalmers has promised his fifth budget will include a savings package, the centrepiece of which is reforms to the National Disability Insurance Scheme that the government expects will result in a net savings of $22 billion over the next four years.
Masters questioned the extent to which the savings would improve the budget bottom line or lower debt owed, and said that “most of [the NDIS savings] is already being spent on other things”.
“I think it’s hard to get such a big change in a single budget when you have these big spending pressures – like defence – that you just really can’t get away from.”
Extracted in full from: https://www.afr.com/policy/economy/households-to-face-prolonged-pain-due-to-fuel-costs-rba-20260507-p5zuj2
