Australia’s inflation slowed more than expected in May, bolstering the case for the Reserve Bank to pause its 14-month tightening cycle at next week’s policy meeting and sending the currency lower.
(Bloomberg) — Australia’s inflation slowed more than expected in May, bolstering the case for the Reserve Bank to pause its 14-month tightening cycle at next week’s policy meeting and sending the currency lower.
The consumer price indicator rose 5.6% in May from a year earlier, the smallest increase since April 2022, Australian Bureau of Statistics data showed Wednesday. That was well below economists’ estimate of 6.1%, with Barrenjoey Markets Pty Ltd. the sole forecaster to predict the reading.
The easing in prices comes as RBA Governor Philip Lowe says policymakers are now in data-dependent mode after raising interest rates by 4 percentage points over the past year. Expectations that the result will allow the RBA to stand pat on Tuesday sent the currency sliding, with the three-year government bond yield also declining while stocks extended gains.
“While these monthly numbers are volatile, today’s print will provide the bank with some confidence that price pressures are easing and Australia’s inflation trajectory is more likely to follow that of Canada, rather than the UK,” said Tom Kennedy at JPMorgan Chase & Co.
Wednesday’s data follows reports that consumers are winding back spending, particularly as mortgage holders are forced to outlay a rising proportion of their income on repayments. Retail figures due on Thursday are expected to show that spending all-but stagnated last month, while business confidence is also weakening.
On the other side, Australia’s labor market persists in defying the odds as hiring remains strong and the jobless rate unexpectedly fell.
What Bloomberg Economics Says…
“The RBA now has the opportunity to look past strong jobs data and wait for further evidence on how the 400 basis points of rate hikes since May 2022 are impacting the economy. Lingering inflationary pressure in rents and electricity prices mean the tightening cycle may not be over yet.”
— James McIntyre, economist
To read the full note, click here
Probing beyond the headline number, there remain signs of stickiness in inflation.
After excluding volatile items, the decline “is more modest,” said Michelle Marquardt, ABS head of prices statistics. The annual trimmed-mean gauge eased to 6.1% from 6.7% in April, still more than double the top of the RBA’s 2-3% target.
Economists said the figures are a sign that tighter monetary policy is having the desired impact, while also highlighting still-high core prices.
“You’ve still got very sticky and elevated inflation,” said Johnathan McMenamin, a senior economist at Barrenjoey. “The items that are driving inflation are on the services side and particularly in rent. So it’s still going to take quite some time to see inflation return to” target.
Today’s monthly CPI report showed:
- The most significant contributors to the annual increase in May were housing, up 8.4%, food and non-alcoholic beverages, 7.9% higher, and furniture, household equipment and services rose 6%
- Partly offsetting the rise was an 8% fall in automotive fuel
- Rent prices went up again to 6.3% in May from 6.1% a month earlier “as the rental market remains tight,” the bureau said
–With assistance from Matthew Burgess and Georgina McKay.
(Adds comments from economists.)
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