Underlying CPI shot up in May, yet the major banks remain at odds on the direction of inflation moving forward.
The May inflation figures have shown that prices are still running above the Reserve Bank of Australia’s (RBA) comfort zone, with a clear divide emerging among the major banks if the RBA will need to tighten the cash rate further or pursue an extended hold period.
Across the year to May, the consumer price index rose 4 per cent, easing a fraction from the 4.2 per cent pace recorded over the year to April - yet still outside the RBA’s 2–3 per cent target band.
Housing costs were the main force pushing the index higher, climbing 6.5 per cent over the year, while food, non‑alcoholic drinks and transport all rose by 3.3 per cent.
On the underlying side, trimmed mean inflation – the gauge the RBA uses to look through volatile swings – stepped up to 3.6 per cent in annual terms, compared with 3.4 per cent previously.
Rachael McCririck, head of prices statistics at the Australia Bureau of Statistics (ABS), linked much of the rise in housing inflation to energy policy.
“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 explained
She also highlighted how sharply fuel had swung in the opposite direction, outlining that “on a monthly basis, automotive fuel prices fell 11.9 per cent in May, after falling by 7.0 per cent in April.”
“These monthly falls include the impacts of the halving of the fuel excise on 1 April and lower world oil prices in recent weeks,” she added.
Westpac and NAB see broader inflation pulse
For Westpac, the key message from the May print is the earlier fuel shock is now seeping into a wider range of prices rather than remaining confined to the bowser.
“The May data provide a stronger signal that second‑order effects from the Middle East supply shock are becoming more visible across consumer prices,” the bank said.
“The key question is whether these price increases reverse as cost pressures ease, or whether they persist.”
It used the example of spikes in hairdressing inflation to demonstrate how businesses may be “adjusting prices not just for higher fuel and transport costs, but for a broader expectation of higher operating costs.”
The bank has maintained its prediction of 0.25 per cent cash rate hikes in August and September, stating “we retain our view that further cash rate increases are coming, with the next hike likely at the August meeting.”
NAB read the print through a similar lens and noted that “May CPI was softer than we expected on headline,” yet stressed that “elsewhere in the detail, inflation pressures were notably broader than April, reflecting further passthrough of cost pressures.”
“Before the Middle East shock, underlying inflation was too high but heading gradually in the right direction, whereas April and May data show some reversal in that trend.”
Its economists now “continue to expect underlying inflation to annualise above the top of the 3 per cent target through the rest of the year as cost pressures flow through.”
Yet NAB also acknowledged that “more broadly, domestic capacity pressures look to be easing,” with the bank keeping in place its forecast of an extended hold period followed by cuts in 2Q27.
CBA and ANZ continue to forecast extended hold
The Commonwealth Bank of Australia (CBA) and the Australia and New Zealand Banking Group took a more measured view – interpreting the May release as broadly in line with their forecasts and consistent with an extended period of the cash rate remaining at its current rate.
CBA said that, to date, the pass‑through from the Iran‑related shock had been more muted than many previously predicted.
“Overall, our estimate that there had been only limited cost pass‑through from the conflict in Iran has proved correct,” the bank said.
“While there remains a risk that the pass‑through has been delayed rather than avoided, some of the more severe inflation scenarios considered in the immediate aftermath of the Middle East conflict now appear to be much less likely.”
CBA outlined that “today’s data supports our forecast of an on‑hold RBA,” while acknowledging that “there is still a risk of further tightening from here at the August meeting or later in the calendar year if inflation proves more resilient.”
Using the May numbers as a guide for their quarterly forecast, ANZ locked in a slightly higher core track, stating “we have finalised our quarterly trimmed mean forecast and are looking for a 0.9 per cent q/q rise in Q2, and trimmed mean inflation to print at 3.7 per cent y/y in Q2.”
[Related: RBA announces latest cash rate call]
Want to see more stories from trusted news sources?
Make The Adviser a preferred news source on Google.
Click here to add The Adviser as a preferred news source.
