Inflation eases, but key measure rises to highest level in almost two years

Inflation has again eased, but there are ongoing signs that underlying price pressures remain a problem for the economy.

The Australian Bureau of Statistics this morning reported that inflation in May eased by 0.1 per cent, taking the annual rate down to 4 per cent. It had peaked at 4.6 per cent in March after the war against Iran pushed up petrol and diesel prices.

According to the bureau, fuel prices fell by 11.9 per cent in May following a 7 per cent drop in April that occurred after the federal government halved petrol excise.

Over the past year, automotive fuel prices are up by 7.7 per cent, well down on the 18.8 per cent annual rate recorded in April.

This drop in fuel prices was accompanied by a fall in prices for clothing and footwear – plus for health services and goods.

But in a concern for the Reserve Bank, both measures of underlying inflation lifted by 0.4 per cent in May, with both now at 3.6 per cent. Underlying inflation is back to its highest level since September 2024.

Before the figures, financial markets put the chance of an interest rate rise by year’s end at 50-50, with most expecting the RBA to start cutting rates by November next year.

In original terms, the bureau found that overall prices fell by 0.7 per cent, slightly larger than the 0.5 per cent recorded in May last year. But in seasonally adjusted terms, the drop was much smaller, at 0.1 per cent.

Housing-related costs continue to be an inflation hotspot.

Electricity prices are up 21.1 per cent over the year, due to the end of federal and state government subsidies. New dwelling construction costs have climbed by 5.6 per cent over the year, while rents have lifted by 3.6 per cent.

The cost of home construction climbed by 0.9 per cent in May, partially due to the flow-on effect of the war in Iran. Costs have now climbed for three consecutive months.

While rent inflation was 3.6 per cent, that is still well down on the 5.2 per cent it was running at this time last year.

There is still inflation pressures in the food sector, with prices up 3.3 per cent over the year after growing by 2.8 per cent in the 12 months to April.

The services sector, which has been an ongoing concern for the Reserve Bank, continues to show inflation pressures climbed by 9.4 per cent over the past year while hairdressing and personal grooming services have lifted by 3.8 per cent.

The bureau’s head of prices statistics, Rachael McCririck, said the lift in food inflation was due to higher prices for takeaway and out-of-home which have climbed by 4 per cent over the past year.

Inflation is running hottest in Darwin with prices there up by 5 per cent over the past year. It is now at 4.2 per cent in Sydney, 4 per cent in Brisbane and 3.5 per cent in Melbourne.

Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.