Oil price shock to hit consumers 'relatively quickly': RBA

RBA assistant governor Sarah Hunter said the central bank expects firms to pass-through higher input costs due to the Middle East conflict to consumers relatively quickly.

Speaking at the Bloomberg Forum for Investment Managers event in Sydney, Hunter said RBA's reports suggest some firms have responded already, with fuel surcharges raised by firms at the start of supply chains that flow into a broad set of industries.

"Expectations for pass-through to consumer prices vary, but we are hearing from some firms that they plan to increase their retail prices," Hunter said.

"For example, 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 has pushed the RBA to revise its inflation forecast higher in the near term. It expects the oil prices shock to put upward pressure on inflation over the next year, contributing around 0.4% to underlying inflation in the March quarter of 2027.

Hunter said the oil price shock will have a direct and indirect impact on consumers, with the increase in the cost of filling cars with fuel flowing directly through to higher headline inflation in Australia.

Indirectly, a rise in oil prices will impact the cost of producing and distributing goods and services. Domestically fuel accounts for around 2% to 2.5% of the cost of producing and distributing other goods and services in the inflation data.

"Components that are more exposed to fuel prices include travel, transport and postal services, some groceries items and new dwelling construction," Hunter said.

"In addition, oil is also an input in global supply chains and will influence imported goods prices. For example, oil and gas are used in the manufacture of fertilisers and plastics, and the cost of these goods has started to rise."

These estimates by the RBA assume the conflict in the Middle East will get resolved soon causing a fallback in oil prices.

However, Hunter said oil prices could stay elevated for longer than implied by market pricing, and the Iran conflict could lead to broader, more persistent supply disruptions, adding to inflation.

"Cost pass-through may also be stronger than assumed, and higher fuel prices could lift and embed higher inflation expectations, which RBA research shows are particularly sensitive to fuel, perpetuating the inflationary shock," she said.

Inflation may be lower, Hunter said, if households and businesses cut back on consumption and investment by more than the RBA anticipates in response to cost-of-living pressures and uncertainty.