Australian Inflation Eases in May, but Underlying Pressures Remain High

Headline inflation eased in May, with consumer prices increasing at an annual pace of 4 per cent, down from 4.2 per cent in April.

Automotive fuel prices dropped by 11.9 per cent in May, on lower global fuel prices, and that helped to drag headline inflation down.

But trimmed mean inflation, the Reserve Bank's preferred measure of underlying inflation, still increased to 3.6 per cent in May, up from 3.4 per cent.

Underlying inflation allows economists to look beneath the daily noise of random price movements to see what the economy's broader inflationary pressures are looking like.

And the Bureau of Statistics says underlying inflation is now running at its highest annual pace since the September quarter of 2024.

The RBA has warned that inflation will trend higher in coming months as the fallout from the global energy shock keeps working its way through Australia's supply chains.

"Today's CPI data is an unwelcome reminder that Australia's inflation problem is not yet solved, with another rate hike in 2026 still likely," Deloitte Access Economics partner Stephen Smith said.

"The economy slowed sharply in the March quarter, households are cautious, and the labour market is cooling.

"That may normally suggest the central bank needs to be patient. But with underlying inflation now above the 2.5 per cent target for almost five years, today's result means the Reserve Bank must remain vigilant."

An uncomfortable situation, a mixed bag

Harry Murphy Cruise from Oxford Economics Australia said underlying inflation was the core challenge for the RBA at the moment.

"Higher input, freight and agricultural costs are still passing through to consumer prices, meaning inflation pressures will take time to fade, even after oil prices normalise," he said.

"Still, the outlook has improved materially over recent weeks.

"Developments over the past fortnight suggest we are closer to the end of the Middle East conflict than the start. Oil prices have responded, falling below US$80 per barrel after trading close to US$120 in May.

"That should keep flowing through to lower fuel prices in coming months, although the gradual restoration of the fuel excise from next week means consumers will not see the full benefit at the bowser."

APAC macro strategist at BNY Wee Khoon Chong said the rise in underlying inflation meant the RBA may lift rates again at some point.

But BetaShares chief economist David Bassanese said the RBA might be done raising interest rates, assuming an end to the Iran war was impending and with oil prices likely past their peak.

"Indeed, there's an increasing chance that the rate rises to date — along with the hit to business and consumer confidence following the federal budget — could dip the economy into recession by year end," he warned.

"If so, this would help the RBA achieve its inflation objectives sooner rather than later, albeit not in the most ideal fashion."