Australia's cost of living squeeze has tightened another notch. The cash rate has been hiked by 25 basis points to 4.1 per cent, marking the first back-to-back hike since mid-2023 as the Reserve Bank battles inflation that refuses to budge.
CPI annual inflation was 3.8 per cent in the 12 months to January 2026, positioning Australia among the highest in the developed world. For ordinary households, the arithmetic is brutal. According to 9News reporting, the average Australian household with a mortgage and at least one car is now almost $75 per week worse off than they were six weeks ago.
The damage breaks down into two distinct hits to the hip pocket. Based on Canstar data, a family with the average national mortgage of $700,000 with 25 years remaining will have to find an extra $211 each month for repayments; that is $49 each week going straight to the bank. Meanwhile, pump prices have escalated to $2.30 per litre and continue climbing, with fuel costs rising $25.80 a week for the average household compared to late 2025 levels.
The culprit is the widening conflict in the Middle East. The conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation. Iran's blockade of the Strait of Hormuz is stopping crude oil from the Gulf states getting to the Asian refineries that supply 80 per cent of Australia's petrol, diesel and jet fuel.
The RBA's decision was far from unanimous. The decision on the hike was passed by a narrow majority, with five votes in favor of the hike and four against. That split reflects a genuine dilemma: inflation is clearly too high, yet hiking rates when an oil shock is hammering supply could paradoxically worsen the pain on households.
Treasurer Jim Chalmers made this argument forcefully after the decision. "Inflation caused by a supply shock cannot be brought down by increasing interest rates," he said, questioning how raising rates could reopen the Strait of Hormuz. The concern is not academic. As fuel filters through the economy, farmers are already warning of grocery price hikes to come. Electricity costs rose 32.2 per cent in the 12 months to January, up from 21.5 per cent to December, a reminder that today's energy shocks become tomorrow's supermarket bills.
There is, however, a case for the RBA's move. The RBA signaled inflation will likely stay above its 2–3% target band for an extended period, with both headline and core measures still elevated. Current projections suggest inflation may not return to the target range until mid-2027. The central bank also faces the spectre of unanchored inflation expectations. If Australians begin believing that 3.8 per cent is the new normal, wage demands and pricing behaviour shift, making inflation even harder to defeat.
The RBA expects inflation will return to its 2%-3% target range by the end of 2026 or in 2027, and to the midpoint of that target range in 2028. In February, the central bank had forecast headline inflation to peak at 4.2% around mid-2026, and then come down to "a little below 3%" by mid-2027. These estimates could be revised upwards, as they came before the oil shock owed to the Iran war.
The path forward is murky. Markets are now pricing in at least three rate hikes for 2026, which would push the cash rate to levels not seen in 15 years. Each rise compounds mortgage pain. At the same time, the energy shock is already acting as a brake on consumer spending. Families spending more on fuel have less to spend elsewhere. For policymakers, the tension between controlling inflation and avoiding economic damage has rarely felt sharper. Whatever the RBA decides next, Australian households are caught in the middle of a genuine policy bind.
For more information on how interest rates affect the Australian economy, visit the Reserve Bank of Australia's monetary policy page. Current consumer price index data is available from the Australian Bureau of Statistics.