MNI: RBA's Hunter Sees Faster Pass Through From Oil Shock

The Reserve Bank of Australia expects higher oil prices to pass through to inflation more quickly than during previous supply shocks because the economy is starting from a position of elevated capacity constraints, Assistant Governor Sarah Hunter told an industry forum Tuesday.

“When capacity is constrained and inflation is already elevated, firms are more willing to adjust their prices, so the inflationary impulse is passed on more quickly and more fully,” she said, noting RBA research estimated these dynamics accounted for between 0.5 and 1.25 percentage points of the rise in Australian inflation during 2022 and 2023.

Hunter noted firms also incorporate expected future costs when setting prices because changing prices frequently is costly and difficult, with research finding only around 10% of non-food retail prices change each month outside sale periods.

“The starting point for Australia’s economy is that inflation was already above target before the conflict began, and we think domestic cost pressures partly explain this,” she said, pointing to above-average labour constraints and non-mining capacity utilisation in early 2026.

Prior to the Middle East conflict, the RBA expected economic growth to slow through 2026 and remain subdued in 2027 as tighter financial conditions weighed on activity and eased capacity pressures, helping return inflation towards target, Hunter noted.

“But all else is not equal. The Middle East conflict is a clear external shock.”

Higher oil and gas prices were expected to lift inflation in Australia and abroad through several channels, she continued, warning risks were skewed to higher inflation if oil prices stayed elevated longer than markets expected or if broader supply disruptions emerged. Stronger-than-expected cost pass-through and higher inflation expectations linked to fuel prices could also prolong the shock, she said.

However, inflation could prove lower if households and businesses reduced spending and investment more sharply in response to cost-of-living pressures and uncertainty, or if labour supply increased as occurred during the post-pandemic tightening cycle, Hunter added.

“At its recent meeting, the Monetary Policy Board weighed up pre-existing domestic conditions, the impact of the higher oil prices and the likelihood of the risks I noted materialising,” Hunter said. “On balance, the Board decided to raise the cash rate to 4.35%.” (See MNI RBA WATCH: 8-1 To Hike; Inflation-Growth Equation Worsens)