The Australian economy has been hit by multiple shocks over recent years, including the Middle East conflict disrupting global oil and gas supply.

 

Small and medium businesses are having to navigate the challenge of sharply higher fuel prices, especially diesel – at a time when, for many, margins were already under pressure.

 

Australia uses diesel more intensively than peer economies because of the nature of our geography and thus our transport system.

 

Passing it on

While cuts to excise and the ceasefire have moderated cost pressures, fuel prices remain higher than before the conflict.

 

Fertiliser costs have risen, which is an issue for agriculture. The pass-through of higher fuel and oil-related product prices into downstream prices seems particularly fast and strong in Australia.

 

Building products have been a standout, with more notifications and larger price increases on average than was the case a year or so ago.

 

The rapid pass-through of costs adds to an inflation environment that was already higher than the RBA’s 2-3 per cent target.

 

The RBA reversed course in early 2026 and began hiking the cash rate again, even before the conflict broke out. Other central banks will mostly seek to ‘look through’ the temporary shock to fuel prices.

 

In contrast, the RBA will want to lean against it, because it sees the economy as being too tight, after a pick-up in growth in the second half of last year, and fears that higher inflation could become entrenched.

 

We therefore expect the RBA to continue raising the cash rate through mid-year, reaching a peak of 4.85%.

 

Seeing the upside

The relatively higher outlook for interest rates in Australia makes investment in Australia’s financial markets more attractive to global investors, boosting demand for the AUD and lifting the exchange rate.

 

This is on top of the reduced appetite for USD assets as initial enthusiasm about AI eases and, at the same time, the US administration’s own approach to disruption spurs investors to seek alternative destinations and new opportunities – especially for the defence industry. 

 

A stronger AUD means cheaper (non-oil) imported inputs, while the prices of the commodities Australia tends to export have been stronger.

 

Businesses that can pivot to take advantage of the shifting cost landscape will come out of this period stronger and more resilient.

 

The innovation opportunity

Australia remains an attractive destination for global talent and is well-placed to reap the benefits of AI and other new technologies.

 

Already, Australia’s software industry has grown to be a $9½ billion export industry in 2025, from almost nothing a decade ago.

 

For the next year or so, though, we expect headwinds from slow growth and higher unemployment. Interest rates will stay high until the RBA is confident inflation is under control.

 

Luci's tip

A price spike is exactly the wrong time to build up inventories. Supply disruptions can be alarming and it is human nature to want to build buffers against them.

 

That is why Australia saw shortages of toilet paper early in the pandemic. Toilet paper production was not disrupted, but deliveries were. Empty shelves spurred people to buy extra to avoid being caught out, making the supply issues worse.

 

The same thing happened with fuel in early March this year: pre-purchasing drained supply at some petrol stations even though fuel deliveries to Australia were continuing.

 

Stockpiling when a shock hits also means buying when the price is highest.

 

Planning for resilience and building buffers in normal times can be cheaper, as well as a differentiator that allows businesses to steer a steady course during turbulence and innovate while competitors are struggling.  

 

This article was first published in Westpac's Backing Business Magazine