Inflation, petrol and electricity: Why Aussie households are in the ‘perfect storm’ of economic pain

Australian households are bracing for a ‘perfect storm’ of variables that threaten to crush budgets as soaring fuel costs collide with rising interest rates, sticky inflation and the cost of keeping the lights on.

Rising inflation has led to three rate rises already this year, and the Reserve Bank of Australia is expected to lift the cash rate again next week at its next meeting.

The Middle East conflict has constricted the world’s oil trade, sending the price of oil and petrol skyrocketing, with unleaded petrol costing $2.30 a litre in some locations and diesel approaching $3 a litre.

“Inflation remains too high, and households are having to devote a larger share of wallet to fuel,” says CommBank Head of Australian Economics Belinda Allen.

“Another rate hike is likely to impact households further, as households who left payments unchanged after the rate cuts in 2025 will now face higher mortgage payments for the first time this year.”

In the latest blow, electricity prices are expected to increase, adding more pressure to strained budgets.

While the cost of using electricity has remained stable and decreased in some areas, other factors are at play.

“While the cost of using electricity has, in many cases, been dropping, the cost of staying connected to the grid has surged,” Canstar Data Insights Director Sally Tindall told nine.com.au.

“High-energy consuming households could well have seen a drop in their overall electricity bill, while low-energy consuming households might have seen their bill go up since July 1,” she added, saying the end of the federal government’s rebates would also have an impact.

The pressure this places on Aussie households is intense, especially at a time when inflation continues to be a concern, making goods cost more and leading to continuing rate rises.

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Despite goods becoming more expensive, Aussies are still spending money, which means inflation isn’t falling.

“They’re still willing to pay for these items, even though they might complain about it, and obviously notice that the cost of goods is going up at the end of the day,” Diana Mousina, deputy chief economist at AMP, told nine.com.au.

“They still have been managing to absorb these increases, which is why we've seen that inflation has just kept on being a problem.”

This has led to continued three rate rises in 2026, which are expected to continue.

The cash rate has already risen from 3.60 per cent at the start of the year to 4.35 per cent, with the four big banks expecting this to rise again to 4.60 per cent by the end of the year.

While there have been times in the last 15 years when inflation and interest rates have been worse, Mousina explained Aussies have felt little relief financially since the economic impact of the COVID-19 pandemic.

“The cost of living crunch, which started from COVID, has just kept on going, even though it’s had its ups and downs and it’s ebbed and flowed throughout 2025,” she said.

“We’ve had two cycles of interest rate rises. We’ve had continuous energy price shocks and petrol price shocks, have had a lot of just general volatility in the world from wars and the uncertainty that that causes, I think that that’s what makes people feel like they’re not really getting ahead.”

While geopolitical factors outside the government’s control, most notably the Middle East conflict, have a bearing on the difficult economic climate, the federal government can rein in spending to ease pressure on inflation, according to economists.

Tindall said the government needs to “curb public spending further, and implement structural reforms”, warning that further cost of living relief such as cuts to the fuel excise may not help Aussies in the long run.

“If the government were to entertain the idea of further cost-of-living relief it would have to be extremely careful, because unless it’s highly targeted it could end up adding to our inflation woes,” she said.

Mousina agrees, though warns cuts in government funding will impact other areas of society.

“Cutting government spending I think is important, but the end of the day, that does mean that some reductions to services will will have to go or lower payments that eventually go to households,” she warned.