In brief
- Australia's headline inflation rate has fallen to 4 per cent, despite predictions it would rise.
- However, the trimmed mean inflation rate, which is favoured by the RBA, rose in May.
Treasurer Jim Chalmers has denied the government's fuel excise cut is masking inflation figures, after headline inflation fell while underlying price pressures continue to rise.
The annual trimmed mean, a measure of core inflation closely watched by the Reserve Bank of Australia (RBA), edged up to 3.6 per cent in May from 3.4 per cent a month earlier, the Australian Bureau of Statistics reported on Wednesday.
The result was above the consensus estimate of forecasters, who had pencilled in a rise to 3.5 per cent.
Headline inflation fell to 4 per cent annually from 4.2 per cent in April, defying economists' expectations of a slight increase.
The fall in the headline figure was driven by an 11.9 per cent dip in fuel prices for the month.
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Housing costs were the largest contributor to annual inflation, up 6.5 per cent.
The trimmed mean is the RBA's preferred measure of inflation as it removes the biggest price swings and volatility.
Responding to a reporter's question about the annual trimmed mean on Wednesday, Chalmers pointed the finger at the conflict in the Middle East.
"You can see it reflected in our forecasts and into the private sector forecast, that the cost and consequences of the war in the Middle East will be felt for some time," he said.
Asked if headline inflation had come down "because of the fuel excise cut", the treasurer said the cut had partially contributed to the fall, but denied it was wholly responsible.
"The government's efforts to cut the fuel excise are part of the story but not the whole story, even when it comes to this very welcome moderation in fuel cost reflected in the inflation figures today," he said.
In April, the government cut the fuel excise — a federal tax levied on petrol — in response to the war in the Middle East, taking it from 52 cents to 20 cents.
The cut was due to expire on 30 June, but the Albanese government has extended it by another month at a lower rate.
"Those costs were felt initially when it came to petrol prices, and that is why we stepped in and stepped up with the fuel excise cut," Chalmers said.
He said the flow-on effects from the conflict were "broadening" out in the economy.
Future rate rises uncertain
The headline inflation rate is closely watched by the central bank because it accounts for a large share of the consumer price basket and tends to be relatively sticky.
The latest figure reflected rising costs for electricity, new dwellings and rents, according to ABS head of price statistics Rachael McCririck.
"Electricity costs are 21.1 per cent higher than 12 months ago as Commonwealth and state government rebates that reduced electricity costs for households are no longer in place," she said.
Ahead of the release, financial markets had been pricing in about a 30 per cent chance of a rate hike at the RBA's next meeting, in August.
The RBA has already increased interest rates three times in 2026, but economists are split on whether the bank has any more in store as it balances its dual mandate of getting inflation under control and maintaining full employment.
Crucial labour market figures are due to be released on Thursday.
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