Policymakers’ preferred core inflation gauge tipped higher in May, with housing costs a significant driver
Australia's headline inflation rate edged down to 4% on a year-on-year basis in May, but a surprise lift in the trimmed mean – the Reserve Bank of Australia's (RBA) preferred measure of underlying price pressures – has intensified speculation about an August interest rate rise.
The fall in headline inflation was largely driven by a sharp retreat in petrol prices. Australian Bureau of Statistics (ABS) data shows automotive fuel prices fell 11.9% in May, after falling 7% in April, including the impacts of the halving of the fuel excise on 1 April and lower world oil prices.
But economists were quick to note that cheaper fuel was obscuring persistent price pressures elsewhere in the economy. Annual inflation for food and non-alcoholic beverages was 3.3% in May, up from 2.8% in April, with food inflation driven by higher prices for meals out and takeaway, which rose by 4%.
Housing also remained a significant driver. Annual housing inflation was 6.5% in the 12 months to May, with electricity costs 21.1% higher than a year ago as Commonwealth and state government rebates that reduced electricity costs for households are no longer in place.
Analysts warn RBA hawks now have justification
The trimmed mean overshoot drew immediate commentary from Brendan Rynne, chief economist at KPMG Australia, who said: "Unfortunately, today's data adds to the case for a rate hike.”
Discussing core inflation, Rynne said: ”Frustratingly we are seeing this rise which will give the RBA the justification it needs to increase rates, most likely in August. Beyond that, it's difficult to predict what will happen but at least one more rise is guaranteed."
Stephen Smith, a partner at Deloitte Access Economics in Sydney, struck a more measured but equally cautious tone, urging the central bank to stay alert. The government's temporary fuel excise cut, he noted, has masked the extent to which inflation pressures remain a problem and is delaying some of the price growth pass-through to other sectors. The central bank had to "remain vigilant" as inflation by any measure remained well above the 2.5% target, said Smith.
Another RBA move in August would place further pressure on mortgage serviceability for existing borrowers and tighten conditions for prospective buyers.
But treasurer Jim Chalmers said the data was "a very welcome set of numbers", although he was careful not to overstate the positive result.
Chalmers said: "This is a very welcome set of numbers, which shows that inflation fell once again for the second month in a row. We're not complacent about that. We know that there are still inflationary pressures in our economy, that's reflected in the underlying measure, but these numbers today are much better than the market expected, much better than forecast, and that's obviously a very good thing.”
Speaking at Parliament House, Chalmers pointed to rising inflation in other parts of the world – including Europe, the United States and Canada – as context for Australia's relative position. He added that the economy was "well placed" to manage ongoing global uncertainty stemming from conflict in the Middle East.
Inflation ‘remains too high’
Westpac analysts said the May data reinforces the RBA’s concern “that inflation remains too high and that a period of slower growth will be needed to return inflation to target”.
Even with oil prices off their highs, and other commodity prices easing to a lesser extent, “we expect some further pass-through from still elevated fuel and commodity costs over coming months, particularly as policy supports unwind”.
They added that wage costs could add further pressure in the second half, especially across market services.
Westpac’s 2026 rate outlook remains the most hawkish among the Big Four banks. It is expecting two 25-basis-point hikes in August and September, which would bring the central bank rate up to 4.85%.
Commonwealth Bank and ANZ expect rates to stay put at 4.35%, while NAB has one more 25-basis-point hike pencilled in for August.
The next RBA cash rate decision is due on Tuesday, 12 August.
