New data has given borrowers a glimmer of hope that the Reserve Bank could be done raising interest rates, but economists warn cooling headline inflation masks underlying cost pressures that aren't going away.
New figures from the Australian Bureau of Statistics on Wednesday show the Consumer Price Index (CPI) rose 4% for the 12 months to May, down from 4.2% in April and 4.6% in March.
Underlying inflation, however, which strips out some of the month-to-month price volatility, has spiked for the first time since the Iran War began, raising speculation the Reserve Bank of Australia may be forced to raise interest rates for a fourth time.
Known as the trimmed mean, underlying inflation rose 3.6% over the 12 months to May, up from 3.4% last month and 3.3% in March. It now sits at the highest annual pace since 2024.
It’s a worrying piece of data for the RBA as the trimmed mean provides a more accurate measure of where inflation is sitting than headline inflation.
"The increase in the trimmed mean, the RBA's preferred measure of inflation, suggests inflation remains persistent in the Australian economy," REA Group economic analyst Luc Redman said.
| Month | Trimmed mean |
| May | 3.6% |
| April | 3.4% |
| March | 3.3% |
| February | 3.3% |
| January | 3.3% |
Deloitte Access Economics partner Stephen Smith agreed the data was an “unwelcome reminder" that Australia’s inflation problem is not yet solved.
Both measures of inflation are significantly outside of the RBA’s 2-3% target range, raising stakes for a rate hike when the bank meet next month.
“Another rate hike in 2026 is still likely,” Mr Smith said.
Westpac is currently the only major lender that had been expecting a fourth rate hike in August, and accurately forecast May’s 3.6% trimmed mean figure. The bank's economists are expecting interest rates to go up again next month.
Westpac economists have long predicted an August rate hike. Pictyre: Brendon Thorne
The Commonwealth Bank had anticipated 3.5%, though the headline figure is slightly hotter than it had predicted.
Household costs bite
Continuing the pattern of the last few months, housing was the largest contributor to annual inflation, up 6.5% - driven by electricity, new housing costs on the back of rising construction prices, and rents.
Food (+3.3%) and transport (+3.3%) costs were also major drivers of inflation.
While Australians have struggled through four months of high food and fuel prices this year along with three interest rate hikes, the peace deal signed between the United States and Iran last week is expected to relieve pressure on headline inflation.
Housing costs continue to weigh most heavily. Picture: Getty
A Memorandum of Understanding was signed by US president Donald Trump and Iranian president Masoud Pezeshkian last Wednesday, though negotiations on the use of ballistic missiles across the Middle East are continuing.
The economic impact continues to be felt in Australian households, with the disruption to global oil access having impacted beyond financial markets into tourism, aviation, gas supplies, and fertilisers.
ABS head of price statistics Rachael McCririck confirmed higher electricity prices had weighed heavily on the May figures, as the RBA had also been expecting.
“Electricity costs are 21.1% higher than 12 months ago as Commonwealth and state government rebates that reduced electricity costs for households are no longer in place,” she said.
The cost of electricity subsidies are beginning to show up in the data. Picture: Getty
Peak yet to come
The RBA and the Treasury have forecast inflation to peak in June, with the path ahead of interest rates is uncertain until data can show cooling is coming through.
Households have been cushioned from the full impact of the global oil shortages on petrol prices since April, by way of the halving of the fuel excise.
Ms McCririck said the government help had spurred the easing on price growth for transport in May, with petrol prices falling 11.9%.
With oil prices still unstable, the government has announced the fuel excise will continue to be subsidised, but at a quartertly rate rather than half.
Petrol prices will continue to be subsidised throughout July albeit less than before. Picture: Getty
The easing, which will wrap up entirely at the end of next month, has masked the true pressure of inflation, Mr Smith warned.
“It is delaying some of the price growth pass-through to other sectors,” he explained. “These pressures will become more visible as the policy is unwound.”
Rate hike outlook
June inflation data will be published two weeks before the RBA’s next interest rates decision, though the timing of the peak does not necessarily mean a rate hike is ahead.
Rising inflation increases the liklihood the Reserve Bank of Australia will raise interest rates again. Picture: Getty
Speaking after the central bank’s decision to hold the cash rate steady earlier this month, governor Michele Bullock reiterated the bank’s decisions influence months ahead, meaning all necessary tightening of monetary policy could already have been handed down.
But she also said the hold decision "does not rule out further tightening".
"I understand this is a difficult period for households and that’s why its so important we get on top of inflation now," she said.
RBA governor Michele Bullock said the bank isn't afraid to keep raising rates. Picture: Getty
"I want to be very clear that inflation remains too high. Unless we have low and stable inflation, we’re not going to be able to have an economy with a good level of employment that grows as well as it can."
With the RBA also contending with rising unemployment and slowing economic growth alongside high inflation, the path forward remains unclear.
“The Reserve Bank will be cautious about over-interpreting a single monthly print, particularly as the global backdrop remains fraught,” Mr Smith said.
“While the fragile peace agreement in the Middle East is a welcome development, the disruption to global energy and logistics markets is unlikely to unwind quickly.”
It is now close to five years since underlying inflation was last within the RBA’s target.
“For households, the message is familiar but uncomfortable,” Mr Smith said. “Inflation is no longer surging, but it is still eroding purchasing power.
“Until price growth slows more convincingly, cost-of-living pressure will remain.”
Economists and lenders remain split on whether the bank might hike the cash rate one more time before the end of the year, with easing not expected for another 12 months, in line with the expected softening of inflation.
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