Australia’s inflation rate continues to slow, thanks to the government temporary halving the fuel excise, but still remains well above the RBA’s target range.

In a grim update for households with a mortgage, the Australian Bureau of Statistics said headline inflation came in at 4.0 per cent for the 12 months until May, down from 4.2 per cent in April.

The cooling of inflation came largely due to a temporary halving in the fuel excise from the Australian government with automotive fuel prices falling 11.9 per cent in May, after decreasing 7.0 per cent in April.

Meanwhile, the all-important trimmed mean inflation rate, which the RBA watches carefully as it strips out volatile items such as fuel, was 3.6 per cent for same period.

This was a 0.4 per cent increase in May, up from 0.3 per cent in April.

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The largest contributor to annual inflation was changing costs of housing-related expenses which were up 6 per cent compared to a year ago, followed by rising food and non-alcoholic

beverages and a lift in transport costs, which were both up 3.3 per cent.

Headache for the Reserve Bank

While the headline inflation rate slowed on Wednesday, economists point out the trimmed mean inflation rate is on the rise, which will cause a “headache” for the Reserve Bank.

AMP economist My Bui says Wednesday’s inflation rate keeps alive the prospect of more rate pain in August.

“We still think there is a high probability of a rate hike at the August meeting, after the full set of quarterly inflation data which will show elevated price pressures across the board,” she said.

So far the Reserve Bank of Australia has lifted the cash rate three times in 2026 by a total of 75 basis points taking interest rates from 3.60 to 4.35 per cent.

If the RBA needs to lift interest rates again in August, the cash rate would be 4.60 per cent.

BDO chief economist Anders Magnusson said Wednesday’s figures confirm inflation is becoming entrenched.

“The RBA can’t ignore this increase in underlying inflation (trimmed mean) and is likely to increase the cash rate in August as a result,” he said.

“The key issue for the Reserve Bank is that these broader inflation pressures, while in line with its forecast, are more difficult to reverse.

“While global energy prices may stabilise, the effects are still working their way through the economy and are likely to persist for some time.”

VanEck head of investments and capital markets Russel Chesler says stubbornly high inflation is putting pressure across the national economy.

“The warning lights are flashing across the consumer economy,” he said.

“Last week’s national auction clearance rate dropped to 47.4 per cent the lowest level since the onset of the COVID-19 pandemic in 2020.

“Consumer sentiment is also deeply pessimistic, with the Westpac-Melbourne Institute Consumer Sentiment Index at 80.6, among the weakest levels recorded in the survey’s fifty-year history.”

“This is the stagflation risk. Inflation is proving difficult to bring down at the same time the economy is losing momentum.

Despite the grim rates call, Ms Bui says Australia could have already passed worst in terms of headline inflation which came in at 4.6 per cent, largely due to moderating fuel costs.

“The sticky trimmed mean number today shows that wage pressures are already building up, even before the larger-than-expected minimum and award wage increases come into effect for FY26-27,” she said.

“And while input price surveys of firms have moderated from the April peak, they remain very elevated, comparable to late 2022-early 2023 levels.”

‘Very welcome set of numbers’

Australian treasurer Jim Chalmers was upbeat about the headline inflation figure, as cost-of-living pressures have slowed over the last two months.

“It is worth remembering in the most recent numbers we have seen inflation tick up in the US, Canada and in Europe, but it has come down in the Australian economy,” he said.

“Our economy is not immune from global uncertainty and volatility, but we are well placed and well prepared to confront it.”

When asked at a press conference, Mr Chalmers conceded there was still inflationary pressures in the economy, which are being shown through the trimmed mean inflation rate.

But he stopped short of saying it could mean higher interest rates for mortgage holders, even though there was a pick-up in the trimmed mean inflation rate.

“When it comes to the trimmed mean, we’ve made it clear for sometime … the costs and consequences of the war in the Middle East will be felt for some time,” he said.

“Those costs were felt initially in petrol prices, but they are broadening in our economy. The big standout is that regard is dwelling construction costs.”

In line with expectations

Prior to Wednesday’s figures, eToro market analyst Josh Gilbert said inflation was expected to slow to 4 per cent, which is still well above the RBA’s 2 to 3 per cent target range.

“The problem is that inflation is still too high, while the labour market is showing clearer signs of softening,” he said.

“That leaves the RBA walking a narrow path between doing enough to bring inflation back to target and doing too much damage to households and the jobs market.”

RBA governor Michele Bullock said in a press conference after this month’s rate decision that the central bank would go as far as necessary to slow inflation but stopped short of calling a recession.

“We don’t want to put the economy into a recession, but we want to slow it enough to get the inflation rate back down to our target rate of 2.5 per cent while trying to keep employment growing and the unemployment rate as low as possible,” she said.

“We are not aiming to put the economy into a recession, but this is why it is such a difficult time and these are very difficult decisions.

“In some ways it would be very easy – and some countries did this – they put interest rates up much higher than we did and their unemployment rate went up and they ended up in a situation where output was declining. We haven’t had that and I really hope we don’t have to have that.”