Inflation has come in lower than expected and sunk back to 5.6 per cent in May from 6.8 per cent in April, prompting some to speculate that the Reserve Bank of Australia (RBA) may pause its interest rate hikes.
Markets were expecting the monthly Consumer Price Index to moderate to 6.1 per cent over the month after a larger-than-anticipated increase in April.
"This month's annual increase of 5.6 per cent is the smallest increase since April last year," Australian Bureau of Statistics head of prices statistics Michelle Marquardt said on Wednesday.
The monthly Consumer Price Index (CPI) indicator rose 5.6 per cent in the 12 months to May 2023, according to the latest data from the Australian Bureau of Statistics (ABS). Source: SBS News / Kenneth Macleod
Housing, food and beverages and furnishings and household equipment recorded the largest price rises, with a fall in automotive fuel offsetting these increases.
But Ms Marquardt said the decline in inflation was more modest when volatile items were stripped out.
Underlying inflation fell to 6.4 per cent in May, slightly lower than the rise of 6.5 per cent recorded in April.
What do the latest CPI figures mean for interest rates?
The official inflation update will be on next week.
Stubbornly high inflation has put pressure on the central bank to keep lifting interest rates to a level that has economists worried about very slow growth or a possible recession.
The central bank has handed out four percentage points of rate increases since April last year in an effort to pull inflation back within its 2-3 per cent target range.
Commentators were quick to weigh in on what the RBA may do next in light of the latest CPI figures.
AMP chief economist Shane Oliver said the May inflation figures show a continuing downward trend in inflation that "provides scope" for the RBA to pause its rate hikes next week.
But he cited "wages risks" among the reasons that he thought the RBA would "retain its tightening bias".
Steven Hamilton, assistant professor of economics at George Washington University in the US, described the latest CPI figures as "good news on monthly headline inflation in Australia, though only a minor slowdown in core / underlying inflation".
"Given the [RBA] focuses on the latter in setting rates, this release shouldn’t meaningfully change your view of what the RBA should or will do next week," he wrote on Twitter.
Callam Pickering, a senior economist at jobs site Indeed, said while the monthly CPI measure "can be a bit volatile and certainly isn't as comprehensive as the quarterly measure it would nevertheless "give the RBA a little to think about" when it decides what to do with the nation's official cash rate next week.
Mr Pickering said he was "leaning towards another rate hike in July - due to the continued strength in the jobs market - but there is a chance that the RBA now waits for the June quarter inflation read which comes out prior to the August meeting".
