Oil Shock Will Lift Inflation Above RBA August View, Bullock Says; Board Next Week

Energy is the factor tilting the outlook hawkish. Bullock linked the worsening inflation picture squarely to fresh Middle East tensions and elevated energy costs, meaning any additional advance in crude strengthens the argument for another RBA move. With her warning that inflation is poised to run above the August baseline and her explicit question about whether the current level of tightening suffices, she keeps the November 2 and 3 meeting active and lends support to the Australian dollar and shorter-dated yields. Her assessment that the jobs market is tighter than previously believed, even as unemployment climbs, undercuts the dovish case that weaker growth will deliver the needed restraint. The trimmed mean release due today now represents the pivotal test: a strong number would probably push markets closer to pricing a November increase.

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Bullock informed senators that oil, AI-related cost strains and a jobs market that is firmer than assumed have lifted inflation above the RBA’s August path, turning next week’s decision into a real debate about whether 100 basis points of tightening will do the job.

Key points:

• RBA Governor Michele Bullock expects inflation to exceed the RBA’s August baseline, with some of the upside risks the bank identified having already emerged.
• Fresh escalation in the Middle East has driven global energy costs far beyond the levels assumed in August, adding significantly to inflation both directly and via transport cost pass-through. Near-term inflation expectations remain high.
• The labour market appears somewhat tighter than earlier assessed, Bullock said, even though unemployment has climbed more than forecast, and underlying inflation tied to domestic demand stays elevated.
• Because productivity growth is weak, aggregate demand must expand slowly for a while longer before inflation falls on a durable basis.
• The cash rate has risen 100 basis points this year. Next week’s Board meeting will weigh whether the policy tightening delivered so far can bring inflation back to target within a reasonable period.
• Home values have declined across most capital cities yet still sit roughly 50% higher than in early 2020. House prices are not an RBA target, Bullock said.

Michele Bullock, governor of the Reserve Bank of Australia, said inflation will probably exceed the August projection, with a fresh jump in energy prices caused by the Middle East conflict adding to domestic capacity strains. That leaves the question of additional tightening open when the RBA Board gathers next week.

Speaking at the Senate Economics Legislation Committee on Wednesday, just before the September-quarter CPI figures came out, Bullock said certain upside inflation risks the RBA noted in August have either shown up or are beginning to show up. The bank’s August outlook saw inflation near the middle of its 2% to 3% target band only late in 2027.

Energy represents the key fresh source of pressure. According to Bullock, the Middle East conflict has intensified again and global energy prices are well above the August assumptions. Oil and related costs, she said, will contribute significantly to inflation, both on their own and through attempts by firms to pass along higher transport expenses. Near-term inflation expectations are also high. In addition, she cited the worldwide AI expansion and severe weather as factors pushing up prices for technology and farm goods.

Bullock emphasised that inflation is not purely an imported problem. Unemployment has come in a bit higher than expected, but she indicated the labour market seems slightly firmer than the RBA had estimated, pointing to persistently high underlying inflation in parts of the economy tied to domestic demand. With weak productivity growth, strong expansion would only intensify price pressures—a challenge she called fundamental for Australia and for real purchasing power in the coming years. Bringing inflation down for good will require another stretch of muted growth in aggregate demand, she said.

Since the panel's June session, the Board has increased the cash rate by 25 basis points, making the cumulative move this year 100 basis points. The full impact is still to come, Bullock said, as household spending cools only slowly while business investment grows rapidly in data centres and renewable energy projects. Most capital-city housing markets have seen prices drop, but values are still roughly 50% higher than at the start of 2020; she reiterated that house prices are not an RBA target.

Looking forward, Bullock said the Board will weigh the incoming numbers and the risk balance next week, the central question being whether policy tightening to date is sufficient to reach the inflation target in reasonable time. She acknowledged that elevated rates are tough for households, but said high inflation must not be allowed to linger, and pointed out that many central banks in advanced economies are either lifting rates or indicating they will if necessary.