By Shane Wright and Millie Muroi
A fall in the price for everything from building a new home to a bag of mandarins has paved the way for the Reserve Bank to cut official interest rates in coming weeks and follow that up with even more relief for home buyers and businesses.
The nation’s biggest lender, the Commonwealth Bank, believes the Reserve will back follow up its May rate cut with back-to-back reductions in July and August after monthly data from the Australian Bureau of Statistics revealed headline inflation easing to 2.1 per cent and underlying inflation at its lowest in almost three years.
Falling housing construction costs have contributed to a further easing in key measures of inflation.Credit: Tamara Voninski
Overall prices actually fell by 0.4 per cent in May with Treasurer Jim Chalmers saying while it was too early to declare “mission accomplished” against inflation, “we are certainly making more progress than what we expected”.
A key driver of inflation over the past three years has been the housing sector, particularly the cost of building new homes. Construction inflation reached almost 22 per cent in July 2022 and was still at 4.9 per cent in May last year.
But it has now tumbled to just 0.8 per cent, its lowest rate in five years, as builders offer incentives and promotions to woo new customers.
Rental inflation in May eased to an annual rate of 4.5 per cent, its fifth consecutive monthly drop, and it is now at its lowest rate since early 2023.
Food inflation eased to 2.9 per cent in May after reaching 3.1 per cent in April. This was due largely to a sharp fall in fruit and vegetable price inflation, which dropped to 2.8 per cent in May from 6.1 per cent in April.
Fruit prices dropped 2.7 per cent in May alone, largely due to cheaper mandarins, oranges, avocados and apples.
Another big hit to consumers over the past three years has been soaring insurance costs. Insurance inflation peaked at 16.5 per cent early last year.
But in May, it fell to an annual rate of 3.9 per cent while prices in the month dropped by half a percentage point.
Prices for services are growing at their slowest rate in three years, while half of all the sectors tracked by the bureau show inflation at less than 2 per cent.
There remain some price pressures, but those are largely beyond the control of the government and the Reserve Bank. Egg prices have climbed by more than 19 per cent over the past year as poultry producers recover from avian flu-related bird culls while lamb prices have increased 12.7 per cent due to drought conditions reducing the national flock.
Before the data was released on Wednesday morning, financial markets put the chance of an interest rate cut at the Reserve Bank’s July meeting at 86 per cent. That climbed to 94 per cent after the release.
Senior Commonwealth Bank economist Belinda Allen said the benign inflation numbers, on top of other recent economic figures, meant the Reserve Bank could cut interest rates at its July meeting and follow that up with another reduction in August.
She said the jobs market was holding steady but economic growth was weak, while consumer and business confidence were sliding.
“With the economic data flow over the past month confirming that inflation pressures remain well contained, and a still uncertain global environment, we think the path is clear for the RBA to move the cash rate swiftly back to a more neutral rate of 3.35 per cent,” she said.
EY chief economist Cherelle Murphy said with underlying inflation now within the Reserve Bank’s target band for the past six months, it could be confident of cutting rates next month without fuelling a lift in prices.
“Low inflation, which is expected to continue, plus weak private sector activity and global policy uncertainty suggests to us that the Reserve Bank will deliver further monetary easing in July. We expect the Reserve Bank to also deliver further rate cuts later this year,” she said.
AMP economists believe the bank will cut in July, August and November before kicking off 2026 by taking the official cash rate to 2.85 per cent at its February meeting.
But RSM Australia economist Devika Shivadekar said that while a cut at the bank’s July 7-8 meeting was likely, it could wait until seeing quarterly inflation data due at the end of next month.
“However, given the RBA’s preference for the more comprehensive quarterly inflation data, it may choose to hold fire in July and await the Quarter 2 CPI data release later in the month—unless it judges that the May figures are sufficient to confirm a sustained disinflationary trend,” she said.
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