Fuel prices to hit customers ‘more quickly and more fully’ due to capacity constraints: RBA
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The news: Higher fuel costs from the US-Iran war are expected to be “passed on more quickly and more fully” to prices as the Australian economy is at its productive capacity limits and has a tight labour market, according to RBA assistant governor economic Sarah Hunter.
The shock to oil prices is expected to put upwards pressure on inflation over the year, equivalent to a 0.4 percentage point increase to underlying inflation in the March quarter for 2027, before easing.
The context: In a speech to the The Bloomberg Forum for Investment Managers Sydney 2026, Hunter said that “on average across history, estimated pass-through is typically gradual”.
However, recent research has found “the conditions in the economy affect the speed and size of pass-through of cost shocks”. Hunter said firms are more willing to adjust prices when “capacity is constrained and inflation is already elevated”, which was already the case in the Australian economy before the US-Iran war commenced.
RBA research also released on Tuesday indicates this effect drove between 0.5 and 1.25 percentage points of inflation observed between 2022 and 2023.
On top of prevailing economic conditions, Hunter said inflation expectations also matter because businesses tend to incorporate future expected cost changes when setting their sale prices to avoid more frequent changes to prices.
“The same RBA research I mentioned before found that in non-food retail (and outside sale periods), only around 10% of prices change each month. In most cases, it’s impossible or costly for firms to change prices every time input costs change,” Hunter said.
She later flagged that how quickly costs are passed on is “a key assumption embedded in our forecast — and we are assuming that this will occur relatively quickly, given the economy is already somewhat capacity constrained”.
The central bank’s business liaison program found that “fuel surcharges raised by firms at the start of supply chains that flow into a broad set of industries”.
Hunter also flagged that some construction firms — who have been relatively highly exposed to transport and oil-derived raw materials cost increases — are reviewing prices for new contracts.
“This is particularly the case in regions where demand is still growing strongly and supply capacity is constrained, consistent with the findings of our recent research,” she said.
The source: RBA speech
