Australia's 12-month headline CPI inflation rate lifted to 4% in May from 3.6% previously, surprising to the upside of the 3.8% consensus forecast. This was the third month in succession that the headline CPI increased - rising from 3.4% to 4% over the period - with today's print revamping pricing for another RBA hike to a near 50/50 prospect at the next meeting in August. The 3-year government bond yield closed on the highs for the session at 4.12% after going into the report at just above 3.9%. The next CPI update is the full quarterly release for Q2 (due 31 July) and this is what will ultimately hold sway with the RBA in August.
Base effects pushed up the 12-month headline CPI from 3.6% in April to 4% in May. Today's report actually showed prices in May fell by 0.1% month-on-month, but with a larger decline of 0.4% in May 2023 rolling out of the annual calculation, headline inflation moved higher and by more than expected. The underlying measures were mostly firmer in May: trimmed mean up from 4.1% to 4.4% and CPI ex-volatile items rising from 3.5% to 3.7%, though CPI ex-volatiles and holiday travel softened from 4.2% to 4.1%.
The key aspect of today's report was the breakdown between services and goods inflation. An unwelcome rise saw services inflation lifting from 4% to 4.8%yr, backing up to its highest since last October. The key contributor was housing pushing up from 4.9% to 5.2%yr, with rents running at an elevated pace (7.4%yr) amid very low vacancy rates across the capital cities. Meanwhile, goods inflation held steady at a 3.3%yr pace.
In a global context, services inflation in Australia is lower than in the likes of the US (5.2%) and the UK (5.7%); however, goods inflation domestically is significantly higher than in those and many other countries abroad. This is the main factor that sets inflation in Australia apart.
Turning to some of the key categories, electricity prices lifted from 4.2% to 6.5%yr with the effect of earlier energy bill rebates fading (however new rebates have since been announced and will push down on inflation); holiday travel swung from -6.2% to 2.9%yr; and fuel prices firmed from 7.4% to 9.3%yr. There was some welcome news today, with food prices slowing from 3.8% to 3.3% - a low since early 2022. Insurance prices continued to run at a very elevated pace (14%), though this was at least down from the prior month (16.5%).
