Australia’s inflation rate eased in May, driven by a sharp fall in fuel prices, but underlying price pressures remain stubbornly high, keeping the Reserve Bank of Australia (RBA) on alert.
New ABS data shows headline inflation slowed to 4.0 per cent over the year to May, slightly below CBA’s expectations and well under market forecasts. The drop was largely due to an 11.9 per cent fall in fuel prices, which significantly weighed on the monthly result.
However, underlying inflation, which strips out volatile items, edged higher, with trimmed mean inflation rising to 3.6 per cent from 3.4 per cent. Services inflation also remained firm at 3.8 per cent, underscoring persistent domestic price pressures.
“Lower fuel prices helped bring headline inflation down, but underlying inflation is still proving sticky,” CBA Senior Economist Trent Saunders said.
“While some feared a sharper inflation spike due to the conflict in Iran, the pass-through into prices has been limited so far. The focus has now started to shift toward a slowing economy, which is becoming more important for the RBA.”
While transport costs led the decline in May, this was partly offset by rising housing costs. New dwelling prices rose 0.9 per cent in the month, pushing annual growth to 5.6 per cent, the fastest pace since mid-2023, as builders passed on higher material and fuel-related costs.
Rental prices also continued to climb, rising 0.4 per cent in May amid tight vacancy rates, while food prices picked up, driven by higher fruit costs.
Looking ahead, fuel excise changes are expected to push petrol prices higher in July and August, although easing global oil prices may offset some of this impact.
Overall, the latest data supports CBA’s view that the RBA is likely to remain on hold for now, though further rate increases remain a possibility if inflation proves more persistent than expected.
