Stagflation Fears Drag Australian Confidence Downward

Australian consumer confidence fell sharply in April, sliding to levels close to historic lows as households face higher fuel costs and elevated interest rates. The decline comes as the Reserve Bank of Australia (RBA) weighs how to respond to inflation pressures that may be building even as economic momentum shows signs of weakening.

RBA Deputy Governor Andrew Hauser said on Tuesday that the combination of rising inflation and softer activity, worsened by surging fuel prices, is a “central banker’s nightmare.” He described the challenge as similar to the 1970s oil shocks, where policy choices can involve trade-offs because steps aimed at cooling inflation may further slow growth, while efforts to support activity can risk adding to price pressures.

Data from the Westpac monthly survey showed consumer confidence dropped 13% to 80 points. The survey indicated the fall was the steepest since the onset of the COVID-19 pandemic, and it was linked to the renewed squeeze on household budgets from fuel costs and higher borrowing rates.

Economists at the Commonwealth Bank of Australia (CBA) said inflation could rise by nearly 1 percentage point to 4.6% by March, which would be well above the RBA’s 2.5% target. They attributed the forecast increase to fuel-price moves, citing a 30-40% rise in unleaded petrol prices and an 80% increase for diesel.

Financial markets have also been adjusting expectations for monetary policy. Pricing indicates a 64% chance of a third consecutive interest rate increase at the RBA’s May 5 meeting, reflecting concerns that inflation may prove more persistent than previously expected.

Hauser said he recognised the upside risks to inflation, while stressing the importance of judging how the shock plays out over the medium term. He pointed to the need to consider both the possibility that inflation remains sticky and the risk that the economy slows, underscoring the uncertainty facing policymakers as they interpret incoming data.

Australia’s exposure to fuel-price swings is amplified by its high per capita diesel consumption, which officials said makes the country particularly sensitive to global energy shocks. In practical terms, the fuel surge acts as a real income hit, reducing purchasing power and adding to the pressures already felt by households.