Huge spike in inflation could spell big trouble for borrowers

The first inflation data to emerge since the start of the war in the Middle East has delivered a supercharged shock to the economy, and almost inevitably, to borrowers.

Australia’s Consumer Price Index (CPI) has surged to 4.6 per cent in the 12 months to March 2026, up sharply from 3.7 per cent in February, marking the highest annual inflation reading since September 2023.

The latest CPI figure is the biggest monthly leap in inflation since September 2023, when the economy was emerging from Covid lockdowns.

The spike was driven largely by fuel and transport costs, with automotive fuel prices jumping 32.8 per cent in March alone, pushing transport inflation up 8.9 per cent annually. Housing costs also remained a major contributor, rising 6.5 per cent over the year.

The monthly CPI rose 1.1 per cent, highlighting just how quickly price pressures are accelerating.

For borrowers, the implications are immediate. The sharp rebound in inflation is likely to reinforce expectations that the Reserve Bank of Australia (RBA) will need to keep interest rates higher for longer, or potentially tighten further.

For the property market, the data underscores a growing tension, whereby constrained supply continues to support prices but rising borrowing costs are weighing on affordability and buyer demand.

If the Middle East conflict and blockage of the Strait of Hormuz continues, the RBA will need to weigh up whether it tries to suppress soaring inflation by smashing mortgagees with large and successive rate hikes or if it waits it out and hopes it is a temporary aberration.

The RBA will make its next interest rate announcement on Tuesday (5 May).

If there is any light at the end of the inflation tunnel for borrowers, its that the RBA’s preferred inflation measure did not rise like the CPI.

Markets actually trimmed the odds of a third 2026 interest-rate rise from the RBA in ​May to 76 per cent, from 85 per cent before the data, with a total tightening of 62 basis points priced in for ‌the ⁠rest of the year, according to Reuters.

Sue-Ellen Luke, the ABS Head of Prices Statistics, said that when prices for some items change significantly, such as automotive fuel, measures of underlying inflation like the trimmed mean can give more insights into how inflation is trending.

Trimmed mean annual inflation was unchanged at 3.3 per cent in the 12 months to March 2026.

Westpac economists had predicted inflation would reach as high as 5.8 per cent in May, and only retreat to 4.7 per cent by the end of this year. Those forecasts may be revised upwards in the wake of the unexpectedly high March CPI data.

While fuel costs have skyrocketed, the ultimate impact of those freight costs has still yet to flow through in full to the price of goods and services.

The data and subsequent cost of living pressures will also be at the forefront of considerations by Treasurer Jim Chalmers ahead of delivery of the federal budget on 12 May.

Of particular concern will be the fact the March inflation data only captured the ​initial impact from the Iran war. A fragile ceasefire has failed to open tanker traffic in the Persian (Arabian) Gulf.

Oil prices are sitting around $110 a barrel, up almost 60 per cent from before the conflict and a sustained blockade of the Gulf could see that price escalate significantly.

Uncertain outlook for property market

Oliver Hume Property Group Chief Economist, Matt Bell, said this is unlikely to move too much in light of Wednesday’s (29 April) results.

“This inflation result isn’t going to change our property view for the rest of 2026, but it confirms what we know is already happening; costs are rising quickly, and the impacts are likely to broaden in April and May. 

“Transport costs for materials and labour suppliers have risen and are being built into upcoming price increases that will end up being borne largely by consumers. 

“The key question remains how long will elevated building cost inflation persist.”

Mr Bell said headline inflation is still forecast to rise to between 5 per cent and 6 per cent by June, with underlying inflation expected to push up toward 4.0 per cent by the end of the year.

“The RBA will have to balance the deteriorating inflation outlook with impacts of increased global uncertainty on economic activity and wealth.

“The unemployment rate stubbornly holding at 4.3 per cent in March won’t have helped an RBA looking to take some heat out of the economy.”

“The outlook for property for the remainder of 2026 has become as uncertain as the outlook for the Middle East crisis and rates.

“Fundamentals remain in place for ongoing strong demand, but plunging consumer sentiment and a potential return to excessive construction cost growth are serious risks.”