Steve Campbell: Fuel costs fan inflation flames and rate risk

Australia’s inflation pulse quickened further, and it will likely see the RBA announce a third consecutive rate hike. Pendal’s head of cash strategies STEVE CAMPBELL explains

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MARCH inflation data was up 1.1%, and 4.6% on a 12-month basis.

Economists were expecting an annual increase of 4.8%. First-quarter trimmed mean inflation rose 0.8%, resulting in the annual trimmed mean rising 3.5%. Consensus was for increases of 0.9% and 3.5% respectively.

Going into the data, the market had priced the odds of the Reserve Bank of Australia (RBA) tightening policy by 0.25% at its May meeting at over 80%.

Post the release the odds dropped back to 70%. The market still has a full two hikes priced in by the end of the year. The RBA will provide an updated set of forecasts via their Statement on Monetary Policy, which will see upward revisions to their inflation numbers where they already had trimmed mean inflation outside of the band for 2026.

The upward revisions will most likely see them tighten policy at their May meeting, taking the cash rate to 4.35%.

Looking at the latest numbers and the following graph shows the annual contribution to inflation by groups for February and March. Month-on-month annual inflation rose by 0.9% from 3.7% to 4.6%.

So what changed from February to March in relation to annual headline inflation?

Looking at the subgroups and not surprisingly the transport group recorded the largest moves, driven by the 32.8% increase in automotive fuel prices. Petrol prices rose by around 30% and diesel prices were up 41%.

Following the surge in fuel prices the transport group is now the second largest contributor to annual inflation, adding 1% to the 4.6% result. The following graph shows the changes to annual inflation by group from February to March:

It was also interesting to see the housing group fall. The RBA had noted the inflation in this group as picking up over the second half of 2025. In mid-2025 this group added 0.3% to overall annual headline inflation. In February 2026 it added around 1.5%.

There are two key areas within this group that has driven the increase. The first is the ‘New dwelling purchases by owner-occupiers’ sub-group. The second is ‘Utilities’, with electricity prices being the key swing factor.

Starting with electricity prices first, and a large part of the increase since mid-2025 is due to the base effect from rebates and state subsidies rolling off from the annual numbers. The annual contribution to inflation from electricity in February was around 0.75%.

In March the annual contribution fell to around 0.55%. So ex-electricity and the housing group still rose. And the area of growth here is ‘New dwelling purchases by owner-occupiers’ sub-group. In mid-2025 this subgroup was adding almost zero to the annual headline inflation number. In February its contribution was around 0.3%. In March this rose further to 0.34%.

There are a few factors at play here. One of them is the labour market is tight, which has been an increasing concern for the RBA. The second is that builders are passing through higher input costs. That will only increase further.

The other group to mention was the 0.2% fall from the Recreation subgroup. This was driven by the domestic holiday travel and accommodation component reflecting a fall in demand from the peak summer holiday period.

What was also noticeable was the lack of contribution from the food group. That will change in the coming months as the second order effect from higher fuel prices start to feed through. Inflation is already above the band and yet to peak. And that is likely to see the RBA tighten for a third consecutive meeting in May.

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.

About Steve Campbell and Pendal’s Income and Fixed Interest team

Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.

Find out more about Pendal’s cash funds:

Short Term Income Securities Fund
Pendal Stable Cash Plus Fund

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here