March CPI hot, but falling fuel prices offer the RBA a pathway to an unlikely hold

Today’s inflation update for March has come in hot, but not as hot as feared. Headline consumer price index (CPI) rose 4.6% in the 12 months to March, up sharply from 3.7% in February, but below the 4.8% consensus expectation. The trimmed‐mean measure for March held steady at 3.3% year‐on‐year (YoY), as expected. The first quarter (Q1) 2026 trimmed mean, the Reserve Bank of Australia’s (RBA) preferred underlying measure, rose 0.8% quarter‐on‐quarter (QoQ), pushing the annual rate to 3.5%. This was also in line with forecasts and marked the strongest pace since the third quarter (Q3) 2024. The fuel shock dominates the detail. Delving into the detail, the surge in automotive fuel prices was the clear standout. Petrol and diesel costs jumped 32.8% from February to March alone, marking the largest monthly increase since the series began in 2017. This surge reflects the direct impact of the Middle East conflict on fuel prices, with average regular unleaded petrol rising from $1.71 to $2.28 per litre. With both headline and trimmed‐mean annual measures sitting uncomfortably above the midpoint of the RBA’s 2% - 3% target band, there remains a strong probability the central bank will act on its hawkish bias and deliver a 25 basis point (bp) rate hike next week to 4.35%. However, a credible counter‐argument for holding rates steady and waiting for more information is emerging. Petrol prices, which drove inflation higher in March, have fallen sharply in recent weeks, returning to near pre‐conflict levels. The decline has been driven by three main factors: the federal government’s decision to halve the fuel excise from 1 April, easing global wholesale petrol prices following signs of de‐escalation in the Middle East, and intensified competition at the pump as independent retailers aggressively cut margins. This rapid reversal in one of the largest contributors to March’s CPI increase gives the RBA a potential pathway to an unexpected pause next week. It would allow the board to assess a broader range of incoming economic data, including consumer and business confidence, household spending, employment, and the April inflation report, ahead of the 16 June board meeting. It would also provide time to gauge the impact of any budget‐tightening measures in the federal government’s budget, due to be handed down on 12 May. The Australian interest‐rate market has pared back expectations for a 25 bp hike next week, with the implied probability falling from around 82% to about 68%. Meanwhile, the ASX 200 rebounded roughly 33 points, recovering from the day’s low of 8659.1 to trade near 8692.2, though it remains on track for a seventh straight session of declines. The ASX 200 needs to reclaim the 200‐day moving average to restore a constructive technical outlook.