Australian inflation has continued to cool, validating the near 80% chance markets have assigned to an RBA rate cut in July. Headline CPI inflation is now pressing the lower end of the RBA's target range after slowing to 2.1%yr in May - well below the 2.4% outcome expected and its slowest pace in 7 months. This was backed up by core inflation (2.4%) that is a tick below the midpoint of the band and services inflation (3.3%) running at a 3-year low.
The ABS's monthly CPI gauge clocked prices falling by 0.4% in May. This was the weakest outcome in 2 years, lowering the annual rate from 2.4% to 2.1%. Price declines in key items including fruit (-2.7%), fuel (-2.9%) and holiday travel (domestic -9.2% and international -4.8%) contributed heavily to inflation falling in May.
Electricity prices have been pushing up on inflation over recent months as the effect of government rebates has been winding down. This continued in May as electricity prices rose by 2%. The ABS highlighted that most households in Victoria received only one installment of the Federal government's rebate in May (compared to two for households billed in April), and this was a key driver of the latest increase. Nonetheless, electricity prices were still 5.9% lower than 12 months prior. Since coming into effect in mid 2023, the ABS estimates the rebates have spared households from a 17.7% rise in electricity prices over the period, with retail prices instead rising by just 1.1%.
Being the middle month of the quarter, the May report included a broader update of services prices than in April. Encouragingly, inflation in services - the key part of the basket for the RBA - slowed from 4.1% to 3.3%yr, its lowest since May 2022. Aside from holiday travel, sports and cultural services and insurance recorded declines in May's update, weighing on services inflation. Goods inflation remained low at 1%yr.
Overall, the key takeaway from today's report is that inflation is slowing broadly across the basket. The various measures of underlying inflation slowed in May to sit at or near the midpoint of the RBA's band: trimmed mean 2.8% to 2.4%yr; CPI ex-volatile items 2.9% to 2.5%yr; and CPI ex-volatile items and holiday travel down from 2.7% to 2.6%yr (seasonally adjusted).
