Economists and other inflation watchers are claiming that the cut in the fuel excise will be inflationary. This is not true, as this claim ignores everything else that is happening in the economy right now.
Wed 1 Apr 2026 00.00
Photo: AAP Image/Joel Carrett
Economists and other inflation watchers have been collectively freaking out at the announcement that the government will halve the fuel tax excise. It’s time to take a deep breath, calm down, and think about what the actual effect might be.
CLAIM: The halving of the fuel tax (reducing the excise on fuel by 26.3 cents a litre) will be inflationary and could prompt the Reserve Bank of Australia (RBA) to increase interest rates.
EXPLANATION: The most common explanation as to why a lower fuel price will be inflationary is that the lower price will increase demand, and this will push up prices and inflation.
REALITY: The explanation above ignores everything else that is happening in the economy right now…
The cut in the excise is not going to lower the price of fuel below what it was before the US and Israel starting bombing Iran. Since the start of the war, petrol prices have increased by 66 cents per litre.
The cut in excise, if it is fully passed through and prices do not increase further, will mean that prices will have increased by 40 cents since the start of the war, rather than by 66 cents.
The ACCC has recently taken Coles to court, accusing them of claiming fake discounts. The ACCC says, and Coles denies, they have been increasing prices and then immediately cutting the price and calling that a discount.
The same applies to this cut in the excise. Prices are not being discounted. They are still going to be higher than before the war.
But to really understand what is going on, consider the counterfactual. If, instead of petrol increasing by 66 cents a litre, the war had caused them to increase by only 40 cents instead. Would people be running around saying fuel prices are going to add too much demand into the economy?
No, people would still be talking about how household’s budgets are getting smashed, and how they are being forced to cut back in other areas.
The idea that any increase in demand will always cause more inflation has taken hold in economic thinking since the inflationary surge in 2022. This is wrong.
If demand is growing too rapidly, then a further increase in demand will be inflationary. But most of the time, when demand is growing at a normal rate, extra demand has no effect on prices or inflation. The economy will happily grow a little faster and absorb the extra demand.
So, is demand growing too fast right now?
The RBA certainly thinks that demand was growing too quickly late last year and into the beginning of this year. That is why they increased interest rates in February and March. The higher rates are designed to take demand out of the economy by forcing people to pay more on their mortgages, giving them less to spend on everything else.
But the increase in fuel prices has a similar effect on demand. People are spending more money filling up at the bowser, so they have less money to spend on everything else. At the Australia Institute, we have calculated that the 66 cents per litre increase in petrol prices has reduced almost as much household spending as both RBA’s interest rate increases this year.
If the increase in petrol prices is reduced to 40 cents because of the cut in excise, it will be equivalent to only one interest rate increase. But that still represents a substantial decrease in household spending.
Amazingly, at the same time there is talk that there is too much demand in the economy, there is also talk that we might be about to enter a recession.
A recession means that the economy can’t sell as much stuff as it could previously. A recession is when demand is too low. But while people are worried about a recession, there are others continuing to worry that demand is too high.
Higher fuel prices will increase inflation. Fuel prices are part of what we measure when calculating inflation. Higher fuel prices will then flow through to higher prices for other things. But it is precisely this process that will see the cut in fuel excise lower inflation.
Treasury estimates that the lower fuel prices from the cut in excise will decrease inflation by half a percent from where it otherwise would have been.
Cutting the fuel excise is an expensive way to tackle inflation. There are better, more targeted measures, the government could have implemented. But the idea that cutting the fuel excise is going to rapidly increase demand and lead to even higher inflation is farcical at best.
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