Australia’s monthly inflation rate retreated in May, easing fears the Reserve Bank will hoist its key interest rate again at next Tuesday’s board meeting.
The headline consumer price index increase last month was 5.6%, the lowest since April 2022, the Australian Bureau of Statistics said on Wednesday. Economists had expected the measure to drop from April’s 6.8% level to 6.1%.
The underlying rate that strips out more volatile price movements came in at 6.4% compared with 6.5% in April.
“While prices have kept rising for most goods and services, many increases were smaller than we have seen in recent months,” the ABS’s head of prices statistics, Michelle Marquardt, said.
Housing costs were among the biggest contributors to the monthly CPI numbers, rising 8.4%, down from 8.9% in April. Rents were up 6.3% in May from a year earlier, compared with 6.1% in April.
Food and non-alcoholic beverages also rose 7.9%, with bread and cereals up 12.8% and dairy products rising 15.1% with both groups’ prices accelerating from April.
Automotive fuel was 8% lower than for May 2022 and 6.7% cheaper than in April, leading the price falls.
Australia’s inflation rate peaked at the end of 2022 but the RBA is keen to ensure the pace of price rises continues to slow towards its 2-3% target range by 2025. The central bank will also have May’s retail sales and job vacancies data – both due to be released Thursday to consider before next Tuesday’s board meeting.
The Bank of International Settlements, dubbed “the central bank of central banks”, over the weekend warned that the “last mile” in inflation was likely to be the toughest. Companies would clamour to retain profit margins while workers would seek bigger wage increases to make up for past shrinkage of pay packets in real terms.
The dollar initially shed as much as a quarter of a US cent to sink to 66.2 US cents as investors pared expectations of a July RBA rate rise. It later clawed back the losses.
Shares also extended their advance for the day on hopes companies’ borrowing costs may be nearer a peak. The ASX200 benchmark stock index was up 1.1 by the close.
Rents continued to climb, with average rentals 6.3% higher in May than a year earlier. (Source: @ABSStats ) pic.twitter.com/klQOjzMI6A
— @phannam@mastodon.green (@p_hannam) June 28, 2023
CBA economist Stephen Wu said the headline CPI decline marked a “big miss” by the market and increased the chances the RBA will leave the cash rate unchanged at 4.1% next week. The bank, Australia’s largest, still expects the RBA to lift the rate to 4.35% in August.
“At this stage there is a chance the [June quarter] CPI headline number prints lower than the RBA’s implied inflation profile of 1.1%,” he said. The ABS is scheduled to release the quarterly CPI numbers on 26 July. The March quarter CPI was up 1.4% compared with the December quarter.
Paula Gadsby, a senior economist at EY, said inflationary pressures remained broad-based as shown by the modest decline in the underlying rate.
“Any stickiness in prices, upside surprises on rents or wages … or further downside surprises in productivity growth present risks to inflation over coming quarters,” Gadsby said.
“This will make it harder for the Reserve Bank to achieve their forecast falls in inflation” and result in interest rates being kept higher for longer, she said.
The chief executive of the Ai Group, Innes Willox, said the headline inflation drop was encouraging but staying “on the path to target inflation will require continued restraint in price setting and wage negotiations by businesses, governments and employees”.
“With GDP growth of just 0.2% in the March quarter, there is very little scope for further slowing without tipping the economy into contraction,” Willox said.
Among the groups showing an increase was insurance, with prices up 14.2% in the 12 months to May, up from 8.7% in April. “This is the strongest annual rise on record, reflecting higher premiums for house, home contents and motor vehicle insurance,” the ABS said.
Electricity prices clocked up a 14.1% increase compared with May 2022 although the increases were down from April’s 15.2% clip and March’s 15.7%. Many consumers will see their bills jump by a quarter or more starting from 1 July.
Holiday travel and accommodation prices fell 11.3% in May alone as tariffs eased from Easter and school holiday highs. These were up 7.3% from a year earlier, a slower pace of increases than April’s 11.9% advance.
