Inflation falls to 5.6pc in May as RBA rates decision looms

The RBA is less likely to raise rates next week after ­inflation fell sharply to 5.6pc in the year to May from 6.8pc in the month before.

The Reserve Bank is less likely to raise rates next Tuesday, after ­inflation fell sharply to 5.6 per cent in the year to May from 6.8 per cent in the month before.

The latest consumer price ­report from the Australian Bureau of Statistics will be welcome news for mortgage holders struggling to deal with soaring repayments, ­although analysts warned that ­inflation remained too high for comfort.

ABS head of prices statistics Michelle Marquardt said that given the monthly volatility, it was useful to look at price growth ­excluding items such as travel, fuel, and fruit and vegetables.

On this underlying basis, the drop in inflation was far more modest: falling to 6.4 per cent in the year to May, versus 6.5 per cent in April, Ms Marquardt said.

Still, JP Morgan economist Tom Kennedy said the latest CPI report would give the RBA some confidence that price pressures continued to ease.

“With the inflation narrative shifting from acute to somewhat more chronic, we retain the bias that the RBA still has a little more work to do, though the urgency to act is now lower,” Mr Kennedy said.

“Accordingly, we are pushing our forecast for the next – and final – rate hike from July to August.”

Economists had anticipated annual price growth to decelerate to about 6 per cent thanks to lower fuel and travel costs, which in Wednesday’s figures were an even larger drag on consumer prices than anticipated.

There was plenty of evidence, however, that the cost-of-living crunch remained intense.

The ABS data showed double-digit annual price growth for a range of grocery staples, while rental cost growth lifted from 6.1 per cent to 6.3 per cent.

Power bills climbed 14 per cent, versus 15 per cent in the previous month.

Eating out and takeaway food prices were up nearly 8 per cent in the year to May, which the ABS said was due to restaurants and cafes passing on to their ­customers the higher cost of ­ingredients, energy, rents and wages.

The figures showed snacks and lollies jumped 12 per cent, while dairy products were 15 per cent higher thanks to higher prices at the farm gate.

The latest figures come ahead of next Tuesday’s RBA board meeting, where monetary policymakers will be weighing the impact of higher borrowing costs on households against the risk of ­allowing inflation to stay too high for too long.

Amid growing warnings of a potential recession towards the end of this year, KPMG chief economist Brendan Rynne said the unexpectedly large fall in ­inflation was more evidence that the peak in rates was near and that there was a higher chance the RBA board would pause on Tuesday.

But Dr Rynne said “with an ­extremely tight labour market and the balance of risks tilted to the upside, the consideration of another rate rise remains on the table in the coming RBA meetings”.

With signs of underlying stickiness in the inflation numbers, investors only marginally trimmed the implied probability of a 0.25 percentage-point rate rise next week to below 20 per cent.

There was better news for ­motorists, with the ABS data showing petrol prices dropped nearly 7 per cent in the month of May, to be 8 per cent lower than a year earlier.

There was also considerable volatility in travel prices, which were 7.3 per cent up on a year ­earlier, but that was after climbing by 12 per cent in the year to April as a result of that month’s Easter holiday period.

The latest consumer price ­figures come as Jim Chalmers on Wednesday revealed the projected $4.2bn surplus for this ­financial year would come in ­“significantly” higher, thanks to solid employment growth and still elevated commodity prices.

But as economists warned of a sharp slowdown later this year, the Treasurer also warned that ­inflation would “stay higher than we’d like for longer than we like”.

Attention will now turn to Thursday’s retail trade figures and job vacancies data, both for May, to gauge the evolving impact of the past year’s 12 rate hikes on spending and the labour market.