Australian Inflation Eases to 4.0%
Australia’s consumer price index (CPI) eased to 4.0% year-on-year in May, down from 4.2% in April and well below the market estimate of 4.4%. This marked a three-month low, which was driven by sharply lower fuel prices.
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On a month-to-month basis, CPI declined by 0.7%, down from a 0.4% gain in April and lower than the market estimate of -0.3%. This was the first decline in monthly CPI since August 2025.
RBA’s Preferred Inflation Gauge Climbs
The Reserve Bank of Australia’s (RBA) preferred core inflation indicator, the trimmed mean, bucked the easing trend, rising to 3.6% in May, up from 3.4% a month earlier and above the market estimate of 3.5%. This points to an upward path for underlying inflation and indicates that the disinflation process could be uneven in the coming months.
No Clear Direction for Inflation
With inflation pointing in different directions, what can we expect from the RBA?
The central bank has been aggressive in its fight to control inflation and has raised the cash rate in May to 4.35%, its highest level since December 2024. At the May meeting, the central bank hiked rate and projected a headline inflation peak of 4.8% around mid-year. However, today’s softer-than-expected-inflation report indicates that the peak is unlikely to materialize. At the same time, the trimmed mean is heading higher and is close to the Bank’s 3.8% forecast for core inflation. With inflation much higher than the RBA’s 2% target, the battle against inflation is far from over.
Friday’s employment report could provide a clue as to what to expect from the RBA at its next rate in August. Employment is expected to rebound to 25 thousand in May, after a dismal -18.6 thousand reading a month earlier. A strong release would support another hike from the RBA in August, while a weak reading would bolster the case for a hold.
Australian Dollar Lower, Stock Market Jumps
The US dollar has shown some strength of late and the AUD/USD currency pair has taken it on the chin, sliding 3.9% in the month of June. The Aussie slipped 1.2% on Tuesday, caught between the surging green back and a tech-driven selloff. The Australian dollar isn’t showing much reaction to the inflation report and is down 0.17%, trading at 0.6904.
The Aussie is trading at 10-week lows and with the US dollar looking sharp against the majors, we could see further headwinds for the Australian currency.
The benchmark Australian index, the S&P/ASX 200 also showed a muted response to the inflation report. The index posted a modest gain on Wednesday of 21.40 points (0.24%), closing the day at 8808.40.
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