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Inflation has unexpectedly slowed to 4 per cent in the 12 months to May – still higher than the Reserve Bank of Australia’s (RBA) target but its lowest level in three months.
The consumer price index came in slightly lower than the 4.2 per cent in April, according to figures released by the Australian Bureau of Statistics on Wednesday.
It was the lowest figure since the war in Iran began in February and the second consecutive month of slowing inflation.
While a welcome sign to economists who were expecting a rise of 4.3 per cent, inflation remains above the RBA’s 2-3 per cent target.
The trimmed mean – the RBA’s preferred measure of underlying inflation – rose to 3.6 per cent in the 12 months to May, up from 3.4 per cent in April.
Oxford Economics head of economic research Harry Murphy Cruise warned that underlying inflation is heading in the wrong direction, and there is a chance of another rate hike as a result.
“If confidence rebounds as geopolitical risks ease, the RBA may need to tighten further, particularly with inflation pressures still coming from both domestic capacity constraints and lingering non-oil global price pressures,” he said.
“To be clear, that’s not our base case; we expect households to remain cautious while inflation continues to eat into purchasing power and national house prices fall.
“But is something the RBA will be watching closely.”
BNY macro strategist Wee Khoon Chong also said another rate increase was possible, as the inflation and trimmed mean results were a “mixed signal”.
“Markets appear too complacent in assuming the current tightening cycle has peaked,” he said.
Westpac has also suggested that wage costs, following the minimum wage increase, could create inflationary pressure in the second half of the year.
“The May data reinforce the RBA’s concern that inflation remains too high and that a period of slower growth will be needed to return inflation to target,” economists Neha Sharma and Sian Fenner wrote.
The RBA held interest rates at 4.35 per cent last week as part of its wait and see approach following three consecutive rises.
The Reserve Bank of Australia's Governor MIchele Bullock. Louie Douvis
Wednesday’s headline inflation figure was driven by a 6.5 per cent rise in housing inflation amid increasing costs of electricity, new homes and rents.
“Electricity costs are 21.1 per cent higher than 12 months ago as Commonwealth and state government rebates that reduced electricity costs for households are no longer in place,” ABS head of prices statistics Rachael McCririck said.
Transport costs also eased to from 6.6 per cent in April to 3.3 per cent in May as fuel prices dropped 11.9 per cent.
“These monthly falls include the impacts of the halving of the fuel excise on 1 April and lower world oil prices in recent weeks,” McCririck said.
The government has extended its expiring fuel excise to August at a reduced rate.
While the excise has helped ease headline inflation, underlying inflation – which excludes fuel costs – is still heading in the wrong direction.
Treasurer Jim Chalmers during a press conference at Parliament House in Canberra. Alex Ellinghausen
Treasurer Jim Chalmers defended the measure and said the economic consequences of the war in Iran will be felt in Australia for some time.
“The government’s efforts to cut the fuel excise are part of the story, but not the whole story, even when it comes to this very welcome moderation in fuel costs reflected in the inflation figures today,” he told reporters.
“The big standout in that regard is dwelling construction costs.
“We have known… about the pressures in other parts of our economy, broader pressures coming from the war in the Middle East, and those dwelling construction costs are part of that story.”
Shadow Treasurer Tim Wilson blamed persistently high inflation on government spending.
“In March 2025, the treasurer triumphantly declared that he had beaten inflation,” he said.
“Australians are now living with the consequence of his arrogance. Chalmers’ persistent inflation is causing living standards to remain at record low levels.”
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