Australians expect fuel prices to move when global energy markets are hit by conflict. Now, many are noticing higher fees beyond the servo.

 

A café bill that feels higher than last month. A tradie invoice with a new fuel line item. A delivery price that now includes a fuel surcharge. These are some of the early signs that higher fuel costs are spreading through the economy, and that is what has economists, and the Reserve Bank, paying close attention.

 

Fuel prices have surged following disruptions to global oil and gas supply and that shock is already flowing into inflation. The bigger question is how far those higher costs spread into everyday prices and whether they stick.

 

Economists call it “pass-through”. Fuel is a direct household expense, but it is also a cost for businesses that rely on transport, deliveries and mobile services. When those higher costs start showing up in prices set by businesses outside the transport sector, inflation moves beyond a simple spike at the petrol station.

 

Westpac economist Justin Smirk says this situation stands out because fuel costs appear to be passing through to other prices faster than in the past, a risk the RBA will be watching closely.

 

In a recent CPI preview, Smirk noted firms are lifting prices beyond fuel itself, often through fuel surcharges or direct price rises.  Many households are already seeing this show up in everyday spending, from meals out to tradie invoices with a fuel line item.

 

Westpac forecasts unleaded petrol prices will reach $2.46 a litre in late May, before rising further when fuel excise returns to normal. Smirk expects fuel to lift CPI by 1.5 per cent in the March quarter and 1.9 per cent in the June quarter, pushing annual inflation to around 5.4 per cent.

 

But for the RBA, the bigger issue sits underneath the headline fuel spike. What matters more is whether higher fuel costs become embedded across a wider range of prices.

 

Smirk says worries around underlying inflation have grown as fuel costs feed into more goods and services. Westpac expects trimmed mean inflation, which strips out extreme price moves, of 0.9 per cent in the March quarter and 1 per cent in each of the June and September quarters. That would lift core inflation to around 4 per cent by September and keep it elevated through the end of the year.

 

That is the risk of “secondary” inflation, where an initial shock (such as higher fuel) spreads through supply chains and service costs, pushing prices higher across the economy.

 

Households are already feeling the squeeze. The Westpac–Melbourne Institute Consumer Sentiment Index fell 12.5 per cent in April to 80.1, its biggest monthly drop since COVID. Westpac economist Matt Hassan links the fall to spiking fuel prices alongside a further 25 basis point rate increase. The ‘family finances versus a year ago’ sub-index fell 16.7 per cent.

 

Westpac Chief Economist Luci Ellis says this pass-through is the key issue for Australia’s inflation outlook and interest rates. If higher costs become embedded in business pricing, they can keep inflation elevated even as fuel prices move around from week to week.

 

There’s a difference between temporary fuel surcharges and broader price rises, Ellis highlights. Surcharges can be removed if fuel prices fall but higher list prices are harder to unwind once in place.  Building materials are a particular pressure point. Ellis says the cost of building a detached home has risen by as much as 10 per cent on preliminary estimates, increases that can flow through to renovations, repairs, insurance and, over time, rents.

 

Westpac expects the RBA to respond to persistent inflation pressures with further rate rises. How far rates go will depend on whether fuel prices ease and whether this pass-through into other prices proves less widespread than feared.