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The latest monthly consumer price indicator shows inflation fell sharply to 5.6 per cent over the 12 months to May, down from 6.8 per cent in April.
Key points:
- The annual rate of inflation slumped from 6.8 per cent in April to 5.6 per cent in May
- Inflation is still well above the Reserve Bank's 2-3 per cent target
- Many analysts believe the latest data may give the RBA room to hold off on another rate rise when it meets next Tuesday
A large fall in the cost of fuel, reversing a sharp rise in April, was the biggest downwards contributor to prices.
"The annual movement for automotive fuel remains volatile, partly reflecting price changes from 12 months ago," said Michelle Marquardt from the Australian Bureau of Statistics, which compiles the data.
"Annually, automotive fuel prices fell 8 per cent in May, compared to a rise of 9.5 per cent in April."
Downward pressure on prices also came from travel and accommodation, as the post-pandemic summer and Easter travel booms subsided, although holiday costs were still 7.3 per cent higher than a year ago.
Housing (+8.4 per cent), food and non-alcoholic beverages (+7.9 per cent), and furniture, household equipment and services (+6.0 per cent) were the biggest contributors to inflation over the year to May.
Rents (+6.3 per cent), meals out and takeaway food (+7.7 per cent), bread and cereals (+12.8 per cent), and dairy products (+15.1 per cent) were areas where annual price rises were up in May compared to April, and were responsible for inflation remaining elevated.
The ABS also noted that insurance prices surged 14.2 per cent in the 12 months to May, which is the strongest annual rise on record, reflecting higher premiums for house, home contents and motor vehicle insurance.
Falling inflation reduces rate rise pressure
Most analysts generally agree the latest inflation data will relieve some pressure on the Reserve Bank to raise interest rates again next week.
"The number is at the very lower end of the range of economists' expectations which ranged from 6.9 per cent to 5.6 per cent and is soft enough by a good margin to see the RBA halt its series of rate hikes in July and possibly beyond," commented IG's Tony Sycamore.
Betashares chief economist David Bassanese agreed Wednesday's figures increased the chances of a pause in rate rises next month, but he said he did not expect that to last.
"The RBA likely has at least one shot left in the locker but could wait until August — after the quarterly CPI release — to use it," he noted.
"It will be wary, however, that a pause in July could encourage a further rebound in house prices and consumer spending."
JPMorgan economist Tom Kennedy also believes borrowers should expect another rate rise, just perhaps not next week.
"With the inflation narrative shifting from acute to somewhat more chronic, we retain the bias that the RBA still has a little more work to do, though the urgency to act is now lower," he wrote.
"Accordingly, we are pushing our forecast for the next (and final) rate hike from July to August."
AMP's Diana Mousina still expects one or two more rate rises, but also argues the latest data provides more evidence inflation peaked last year and is falling fairly quickly.
"There are clear signs that inflation is slowing and there will be further downside in coming months (we expect annual inflation to be around 4 per cent over the year to December 2023) however clearly the pace of inflation is too high and well above the RBA's target 2-3 per cent target band," she wrote.
"The RBA may also be concerned that some of the underlying inflation measures like CPI excluding volatile items and travel was up by 6.4 per cent year-on-year — higher than the headline index."
According to financial market data on Refinitiv, markets are currently pricing in at least a 70 per cent chance that the RBA will not shift rates when it meets on Tuesday next week.
The Australian dollar fell on the data, as traders cut back their rate rise expectations, and was worth 66.35 US cents at 12:15pm AEST.