Rise in underlying inflation in year to May likely to concern the RBA
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More news: The latest inflation print may have shown a moderation in the headline figure, but the underlying number has accelerated in annual terms adding credence to case that the rate hike cycle this year is not over.
Moody’s Analytics head of Australia Economics Sunny Nguyen said the underlying inflation lift is “making the case for 4.35% as the cash rate peak harder to prosecute”.
She pointed to “three forces” that are keeping underlying inflation firm despite the “fuel collapse”. This includes annual new dwelling inflation jumping from 4.7% to 5.6% in a single month, “rents have stopped helping” and services inflation picked back up.
“The most uncomfortable element in this print isn’t the trimmed-mean uptick; it is non-tradables inflation sticking at 4.7% for a fifth month, with no sign of breaking lower,” Nguyen said.
“The RBA may be patient in August to see the full slowdown pass through, but if the trimmed mean keeps creeping up through the third quarter and the non-tradables wall holds, it’s gonna be hard for it to justify not doing more to bring inflation back to target, no matter what it takes.”
EY chief economist Cherelle Murphy flagged that the six-month annualised growth rate for underlying has hit 3.5%, which will “concern the Reserve Bank Board because it suggests inflation pressures are proving sticky, even as headline inflation has eased slightly”.
“With the full impact of supply shortages and higher global prices for commodities yet to be felt in downstream goods and services, upside inflation risks remain a key concern for the RBA,” Murphy said.
“These risks reflect existing capacity pressures in the economy, uncertainty around the conflict in the Middle East, and firms passing on their higher input costs. Even with a peace deal in the Middle East, a return to normal supply conditions is likely to take months.”
Westpac economist Neha Sharma said ” we retain our view that further cash rate increases are coming, with the next hike likely at the August meeting”.
CPI rose by 4% in the 12 months to May
The news: The consumer price index (CPI) increased by 4% in the 12 months to May 2026, below the 4.4% market consensus expectation.
Trimmed mean inflation for the 12 months to May came in at 3.6%, ahead of the market consensus expectations for a 3.5% increase. Automotive fuel has been excluded from this measure since March amid volatility in fuel prices following the US-Iran war.
The numbers: The CPI increase in the year to May was lower than the 4.2% increase in the year to April and the 4.6% increase in the year to March.
Trimmed mean inflation in the year to May was higher than the 3.4% increase to April and the 3.3% increase to March.
Over the year, housing (+6.5%) was the largest contributor to annual inflation, followed by food and non-alcoholic beverages (+3.3%) and transport (+3.3%).
Housing inflation reflects rising costs for electricity, new dwellings and rents. Electricity costs are 21.1% higher than a year as Commonwealth and state government rebates are no longer in place.
Automotive fuel prices fell 11.9% in the month to May after falling 7% in April.
CPI fell 0.7% on a month-to-month basis in original terms and fell 0.1% in seasonally adjusted terms.
The context: The May inflation data is the second set to include the impact of the federal government’s temporary halving of the fuel excise. While the 32-cent per litre cut will expire on 1 July, it will be replaced by a lower 16-cent cut until 2 August.
The RBA has lifted interest rates on three occasions this year before holding steady following the latest monetary policy board meeting in mid-June.
However, RBA governor Michele Bullock warned that “we still think that there are risks to the upside” due to the lingering impacts of the recent fuel shock on the price of other goods and the persistence of domestic inflation pressures before the US-Iran war.
The sources: ABS media release, ABS data
