A surprise fall in inflation has boosted hopes of an interest rate cut after a key measure dropped to its lowest level in nearly four years.
Data from the Australian Bureau of Statistics on Wednesday showed headline inflation fell from 2.4 per cent to 2.1 per cent in May.
The monthly figures also showed a sharp drop in trimmed mean inflation, which removes volatile price rises, from 2.8 per cent to 2.4 per cent in the month.
It’s the lowest level for trimmed mean inflation since November 2021.
The trimmed mean is the preferred measure of the Reserve Bank when assessing inflation and the drop has bolstered the prospect of a rate cut when the board meets next in July.
Experts put the chance of another reduction, which will be welcomed by cash-strapped borrowers, at a near-certainty after the better-than-expected inflation figures.
Economists had tipped inflation to be on hold at 2.4 per cent for the month.
Treasurer Jim Chalmers said the battle against inflation was not over but the figures were a welcome development.
“The progress we’re making together on inflation is substantial and it means that it’s sustained,” he told reporters in Brisbane on Wednesday.
“I didn’t say it’s mission accomplished, but we are certainly making more progress than was expected.
“We’re further along the path than economists were anticipating today, and that’s a very good thing.”
May’s figures were the sixth month in a row both headline inflation and the trimmed mean were in the Reserve Bank’s target range of between two and three per cent.
IG Australia market analyst Tony Sycamore said the odds of a 25-basis point rate cut in July had grown from 80 per cent to 93 per cent since the release of inflation numbers.
Economists have tipped a further three rate cuts before the end of 2025, which could lead to the cash rate falling to 3.1 per cent.
The largest contribution to the price rises came from an increase in food and non-alcoholic beverage costs, up 2.9 per cent in the 12 months to May, housing, up two per cent, and alcohol and tobacco, up 5.9 per cent.
The bureau’s head of price statistics Michelle Marquardt said the cost of coffee and tea had helped to drive up the prices of non-alcoholic drinks by 5.2 per cent.
“Higher prices for coffee drove the rise with adverse weather conditions impacting major overseas coffee bean-growing areas,” she said.
But there was only a small rise in holiday travel costs, which were up 0.6 per cent in the 12 months to May, down from the sharp 5.3 per cent increase recorded for April.
Despite unrest in the Middle East, the price of fuel fell by 10 per cent in the year to May, with petrol prices at their lowest levels since September 2022.
“Across capital cities the average price for unleaded petrol in May was $1.73 per litre,” Ms Marquardt said.
“This is 20 cents lower than 12 months ago and significantly below the peak monthly average price of $2.07 per litre in September 2023.”
While the monthly figures were more volatile than the closely watched quarterly data, Dr Chalmers said it was reassuring there had been a reduction in inflation in a period of global tensions.
“The Australian economy is not immune from instability in the Middle East, including from the recent volatility in global oil prices,” he said.
“That’s why the progress we have made together in the economy is so important.”
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