Inflation eases to 4% but housing keeps core pressure elevated
- Headline inflation slowed to 4% in May, driven by falling petrol prices.
- Underlying inflation, however, rose to 3.6%, remaining firmly above the RBA’s target band.
- Housing inflation accelerated due to sticky cost-side pressures including new dwellings, electricity and rents.
The latest ABS Consumer Price Index (CPI) slowed to 4.0% in the 12 months to May from 4.2% in April, with monthly headline figures moderating to 0.1% on a seasonally adjusted basis.
In original terms, prices fell 0.7% in the month, compared with a 0.4% rise in April.
Market consensus was for the headline CPI to land at 4.3%, with CBA being the closest to the actual figures, expecting inflation to slow to 4.1%.
Lower petrol prices drag on headline inflation
As expected, transport costs weighed on headline figures as automotive fuel prices further fell 11.9% in May after declining by 7% in April.
“These monthly falls include the impacts of the halving of the fuel excise on 1 April and lower world oil prices in recent weeks,” ABS head of prices statistics Rachael McCririck said.
The temporary 32c per litre cut to fuel excise is set to expire on 30 June, leading market analysts to forecast around 19% increase in pump prices in July.
Prime Minister Anthony Albanese, however, earlier noted the possibility of an extension.
According to NAB senior economist Taylor Nugent, a 10% fall in fuel prices effectively subtracts 30-40 basis points from headline inflation.
Mr Nugent said the risk that quarterly trimmed mean will come in at 1.0% in Q2, in line with RBA May SoMP, skews to the downside due to falling fuel prices.
“The sharp fallback in refined fuel prices means Q2 headline inflation is tracking well below the RBA’s May forecast and underlying inflation is unlikely to surprise to the upside of the RBA’s 1.0% q-o-q estimate,” he said.
Core pressures persist as housing inflation accelerates
Despite easing headline figures, underlying inflation accelerated 3.6% annually, up from 3.4% over the 12 months to April.
This keeps core inflation firmly above the RBA’s 2-3% target band.
The trimmed mean is also a notch higher than the major banks CBA, NAB and ANZ expected, which had all forecast underlying inflation at 3.5%.
Driving the surge was housing, which rose 6.5% over the year off the back of sticky cost-side pressures including electricity, new dwellings and rents.
Housing accounts for about a fifth of the CPI basket, thereby making it a dominant driver in inflation moves in Australia.
“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,” Ms McCririck said.
Meanwhile, new dwelling costs inflation surged 5.6% in May, its fastest pace since July 2023.
CBA expected the increase as the impacts of fuel surcharges and higher material costs for new home builders flow through to new dwellings, though the extent remains uncertain.
“We expect pass–through to have increased in May, with risks to our estimate being balanced,” CBA senior economist Trent Saunders said.
Citing insights from trade suppliers, Mr Saunders added material costs growth, which rose in April and May, is expected to slow from July.
NAB’s Taylor Nugent likewise noted construction input cost pressure “is evident, but the more extreme price rises are narrowly based”.
Housing price outlook expected to soften
Forward indicators suggest the current strength in housing inflation may not translate into sustained house price growth.
In addition to recent housing tax policy changes that are expected to slow home prices and turnover in the coming months, high interest rates continue to weigh on borrowing capacity.
Despite the RBA Board electing to hold the cash rate in June, analysts don’t expect it to arrest the cooling momentum across housing markets.
“I do think that we’re likely to continue to see weak momentum for Australia’s housing market, irrespective of the fact that we’ve seen that pause from the RBA,” Domain chief of research Dr Nicola Powell told the Savings Tip Jar podcast.
The latest proposed policy tightening, which would ban lending to self-managed superannuation funds (SMSFs) to purchase residential properties, is also expected to reinforce the slowdown.
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