Key facts
- Australia's annual inflation rate decreased to 4% in the year to May, primarily due to a nearly 12% drop in fuel prices.
- The Reserve Bank of Australia's preferred measure of underlying inflation, the trimmed mean, increased to 3.6% in the year to May.
- Home building costs saw a 0.9% increase in May, pushing the annual rate to 5.6%.
- Food and drink inflation accelerated to 3.3% year-on-year.
- Economists hold differing views on whether the Reserve Bank of Australia will implement further interest rate hikes.
Australia's annual inflation rate unexpectedly fell to 4% in the year to May, primarily driven by a significant drop in petrol prices. However, underlying inflationary pressures remain a concern, with the Reserve Bank of Australia's preferred trimmed mean measure of inflation climbing to 3.6%.
The Australian Bureau of Statistics reported that while headline inflation eased from 4.2% in April, the decrease was largely due to a nearly 12% fall in fuel costs during May. This masked a further lift in underlying price pressures, with home building costs rising 0.9% in May and food and drink inflation accelerating.
Treasurer Jim Chalmers acknowledged the positive headline figure but cautioned against complacency, stating that inflationary pressures persist in the economy. The mixed signals from the consumer price report have left interest rate predictions largely unchanged, with financial markets assigning a 32% chance of a Reserve Bank of Australia rate hike on August 11 and a 56% chance by the end of the year.
Economists offer differing perspectives on the RBA's next move. Sally Auld of NAB suggested that the lower inflation print and signs of economic slowing might lead to a less hawkish tone from the central bank, predicting the next move would be a rate cut. Conversely, Shane Oliver of AMP believes that the hotter-than-expected underlying inflation reinforces his expectation of a fourth rate hike in August, citing the RBA's concern about preventing a high inflation psychology.