April inflation at 4.2 per cent, down from three-year high but other signs are more worrying

Updated May 27, 2026 — 18:07,

Home borrowers may be spared a rate hike this year following an unexpected softening in inflation, despite signs that the rise in oil prices caused by the war against Iran is seeping into the economy and already causing a slowdown in growth.

The Australian Bureau of Statistics reported on Wednesday that inflation fell to 4.2 per cent in April after rising to 4.6 per cent in March. Last month alone, prices fell 0.1 percent, following a 1.1 percent increase in March.

The increase in fuel prices in March caused inflation to rise.Louie Douvis

Gasoline and diesel prices, which rose by nearly a third in March, fell 7 percent in April, largely due to consumption cuts by the federal government. Despite last month’s drop, fuel prices were still 23.5 percent higher in February before the United States and Israel launched an attack on Iran.

Despite the drop in fuel prices, figures show that businesses are passing on increased transportation costs to consumers.

Postal service prices increased by 6 percent in the month, up 12.4 percent by the end of the year, AMP economist My Bui said. Home construction costs rose 7 percent in April as builders paid fuel surcharges and more expensive materials.

The cost of holiday travel, both domestic and international, also increased strongly in April. Some of this was due to seasonal demand during the school holiday period, but some of it was also due to airlines passing on the cost of higher-priced jet fuel.

And in a sign that price pressures remain in the economy, the closely watched key measure of inflation rose slightly to 3.4 percent, up slightly from 3.3 percent in March.

Finance Minister Jim Chalmers said the government’s halving of fuel duty last month had helped ease price pressures, but the cost of living cut was unlikely to be extended beyond its planned end on June 30.

“Treasury analysis shows that our cut in fuel tax reduced headline inflation by about half a percentage point,” he said.

Chalmers welcomed the modest moderation in food and rent prices in the latest data but warned that the effects of the Iran war would continue across the economy.

But shadow treasurer Tim Wilson said inflation was still too high and rising prices meant the $250 income tax offset promised in the budget “will be wiped out by Christmas”.

“The Albanian government’s active inflation agenda started before Iran, was further exacerbated by Iran, and now they are using it to bring their own budget ‘tax cuts’ to its knees,” he said.

Financial markets, which expected the headline inflation rate to be 4.4 percent, immediately reduced the possibility of an interest rate increase.

As recently as last week, markets were expecting a rate hike by August, with the 50-50 chance of borrowers taking a further hit ahead of Christmas.

Following the figures, markets determined the probability of an interest rate hike in August as one in three. The chances of a rate hike this year are currently at 76 per cent, with investors expecting the RBA to cut rates by Christmas next year.

HSBC Australia chief economist Paul Bloxham said he believed the Reserve Bank, which he expects to keep interest rates steady in the coming months, will take some comfort from the numbers.

He said there were only limited signs that fuel prices were starting to trickle down to a wider range of products and services. More worrying was the state of the overall economy.

“Our general view is that the economy is weakening quite rapidly. Recent sharp declines in sentiment signal that an economic downturn is already on the way,” he said.

“Last week’s weakening employment figures are another indicator of this trend. We think there is a high probability that GDP will fall already.”

Wednesday’s Westpac-Melbourne Institute leading index, which attempts to track the likely pace of economic growth for up to nine months into the future, fell further into negative territory in April.

Westpac’s head of macro forecasting, Matthew Hassan, said the April result, alongside the negative March report, was the first time back-to-back below-trend readings since late 2004.

“The Australian economy is showing clearer signs of losing momentum,” he said.

The effects of the war against Iran and the long-term effects of high oil prices are a major issue facing the RBA.

Carolyn Hewson, a member of the Central Bank’s interest rate-setting committee, said on Wednesday night that the importance of oil to the economy has decreased since the oil shocks of the 1970s, but price increases could pose an inflation risk if people begin to expect higher prices.

“Over time, there is also a risk of a second-round effect if higher fuel prices begin to impact inflation expectations or wage bargaining, particularly if price increases are large or sustained,” he said.

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