Freshly released purchasing managers’ index (PMI) data from S&P Global has painted a mixed but largely concerning picture of Australia’s private sector economy, revealing stubborn and faster-than-expected inflationary pressures fueled by ongoing conflict in the Middle East. The April survey, which polls 400 manufacturers and 400 service providers across the country, shows that business activity stabilized this month following a contraction in March, but cost and consumer price inflation have both surged to 3.5-year highs, far outpacing economist forecasts.
Supply chain disruptions stemming from the Iran-centered war that broke out in late February have been the primary driver of rising costs, with the closure of the Strait of Hormuz cutting off roughly 20% of global oil supplies and choking off shipments of key raw materials from the Persian Gulf, including fertilizer and medical-grade helium for MRI machines. S&P Global economist Eleanor Dennison explained that Middle East conflict has put intense strain on manufacturing supply chains, pushing supplier lead times out to their longest since mid-2022. “Greater outlays on fuel and freight also pushed cost inflation to its highest in just under four years,” she added.
The data confirms that rising input costs are not being absorbed by businesses, but are instead being passed directly to end consumers, pushing “charge inflation” – the rate at which businesses increase prices for customers – to its highest level since late 2020. While the overall manufacturing benchmark edged back into growth territory in April after contracting in March, both manufacturing output and service sector activity registered sub-50 readings (the threshold that separates growth from contraction), with manufacturing output falling from 49.4 to 48.2. The service sector, meanwhile, bounced back from March’s sharp decline to stabilize near neutral, driven by modest job creation even as demand remains soft.
The biggest takeaway from the data, according to Judo Bank senior economist Matt De Pasquale, is that inflation is becoming more broad-based across the Australian economy than most analysts predicted. That outcome significantly increases the likelihood that the Reserve Bank of Australia will implement additional interest rate hikes to curb price growth, he argued. “What the data suggests is that inflation could be picking up broadly and more than was initially anticipated given that growth is holding up. That would support the RBA focusing on inflation, getting ahead of it with further interest rate rises,” De Pasquale told NewsWire.
There are limited bright spots in the latest snapshot: the overarching composite PMI, which measures combined private sector activity, bounced back into neutral territory after contracting in March, when the outbreak of war first sent shockwaves through global markets. New business orders did decline for the second consecutive month in April, as widespread economic uncertainty dented domestic sales, but export orders to key markets including North America, Asia, and New Zealand saw a small uptick.
Dennison warned against overstating the modest growth in the headline manufacturing index, noting that underlying indicators remain weak. “To understand how manufacturers are faring, we must look beneath the positive headline index print, as output, new orders, employment and stocks all fell at modest rates,” she said. “Despite growing price pressures and persistent weakness in domestic demand, latest data saw output stabilise following March’s decline.”
The conflict-driven supply shock is also rippling through regional trade networks, affecting Japan – Australia’s third-largest import supplier, which shipped $23 billion worth of goods to Australia in 2025, according to UN trade data. Japanese manufacturing output surged from 52.1 to 55.4 in April, hitting its fastest pace of growth in 12 years, as manufacturers rushed to produce goods ahead of expected further supply chain disruptions. That surge has however amplified input cost competition and extended delivery times, pushing Japanese business inflation to its highest in nearly four years. S&P economist Annabel Fiddes noted that “there were reports that some manufacturing firms boosted output due to concerns and uncertainty surrounding the war in the Middle East and the potential for further supply chain disruptions. The latter contributed to not only a much sharper rise in costs but the most pronounced increase in average delivery times for manufacturers’ inputs for nearly four years.”