Australia’s March quarter inflation data is shaping as a critical test for the Reserve Bank of Australia (RBA) ahead of its May rates meeting, with major bank economists expecting underlying price pressures to remain stubborn even before the full impact of the Middle East fuel shock filters through the economy.
ANZ expects trimmed mean inflation (due to be published by the Australian Bureau of Statistics on Wednesday 30 April), the RBA’s preferred core measure, to rise 0.9 per cent quarter-on-quarter in the March quarter, lifting the annual pace to 3.6 per cent, while headline inflation is forecast to climb 1.4 per cent over the quarter and 4.1 per cent over the year.
The bank said that would leave quarterly trimmed mean inflation broadly in line with the RBA’s February forecast, though it sees “some upside risk, with a 1.0 per cent q/q print more likely than a 0.8 per cent q/q”.
Rising fuel costs are expected to explain much of the divergence between headline and underlying inflation, with ANZ forecasting a 35 per cent month-on-month jump in automotive fuel in March that would lift monthly headline CPI by 1.2 per cent.
Even with fuel largely trimmed out of the core measure, the bank said flat fuel prices in March would have left quarterly trimmed mean about 0.1 percentage points lower.
That backdrop has kept ANZ on its call for another tightening move, with the bank maintaining its expectation of a 25 basis point increase in May that would take the cash rate to 4.35 per cent.
Commonwealth Bank is also bracing for a firm inflation print, with associate economist Lucinda Jerogin saying: “The March release will provide an update on underlying price pressures ahead of the RBA’s May Board meeting (4-5 May), as well as insights into how prices initially responded following the start of the Iran war.”
Jerogin added: “We expect headline inflation rose by a strong 1.1 per cent in March to take the annual rate to 4.6 per cent. The policy relevant trimmed mean measure is expected to have risen by 0.9 per cent in the first quarter of 2026with the annual rate lifting to 3.5 per cent. If realised, this would be the third consecutive quarter of trimmed mean increasing by 0.9 per cent/qtr or more.”
“In this environment, we expect the RBA to respond by lifting the cash rate 25bp in May to 4.35 per cent. However, the decision will again be line-ball, with board members weighing upside risks to inflation against downside risks to growth.”
HSBC chief economist Paul Bloxham said Australia was entering the latest inflation shock from a weaker starting position than many developed peers because price pressures were already elevated before oil prices surged.
“The RBA, the challenge is that inflation was already too high, even before the Middle East conflict energy price shock. We expect this week’s Q1 CPI figures to confirm that the headline CPI and trimmed mean were well above the RBA’s 2.5 per cent target and this is before the full effect of the fuel price shock arrives.”
He added: “At the same time, the Australian economy has also been operating beyond its sustainable capacity and the jobs market has been tight. In our view, this combination makes Australia is one of the least well-placed developed economies to deal with the inflation shock that is arriving.”
Australia’s tight labour market and still-firm activity mean the risk of higher inflation becoming embedded in expectations is greater than in many comparable economies, according to Bloxham, who argued that stronger wage demands and firmer pricing power could amplify the fuel shock.
While he said weaker sentiment suggested a downturn was already beginning, he still expects the RBA to tighten again in May, saying “we expect the RBA will still choose to lift its cash rate further in May, to 4.35 per cent”.
Judo Bank’s Warren Hogan and Matthew De Pasquale also warned that the inflation risk this week was tilted to the upside, saying fuel costs were likely to lift headline inflation to 1.4 per cent for the quarter and 4.1 per cent annually, while trimmed mean was expected to print at 0.9 per cent.
Their note said: “The risk is to the upside however. Some pass-through of surging fuel costs by businesses is expected to show up in the March data, with wider price pressures more likely to emerge in the April monthly CPI numbers.”
They added: “A trimmed mean quarterly inflation print of 1.0 per cent this Wednesday, which would imply firms are responding more quickly than anticipated to the fuel price increases by putting up their prices, would likely drive a pickup in rate expectations.
“We see back-to-back hikes in May and June as a very real risk if activity continues to hold up, which so far appears to be the case despite weaker sentiment.”
Wednesday’s CPI release is therefore unlikely to ease the RBA’s inflation dilemma, with the consensus across the major bank economists pointing to core inflation that remains well above target and a fuel shock that is only beginning to work its way through household and business costs.
