Inflation surprise as rate of price growth slows in May

A sharp fall in consumer prices will take pressure off the Reserve Bank, but persistent growth in rents and services will keep further rate hikes in play.

The consumer price index sunk back to 5.6 per cent in the year to May, from 6.8 per cent in April.

The result was well below market and most economistsā€™ expectations, with a sharp turnaround in fuel prices feeding into the weak result.

ā€œThis monthā€™s annual increase of 5.6 per cent is the smallest increase since April last year,ā€ Australian Bureau of Statistics head of prices statistics Michelle Marquardt said.

ā€œWhile prices have kept rising for most goods and services, many increases were smaller than we have seen in recent months.ā€

A 6.7 per cent fall in automotive fuel prices in the month of May, to be down eight per cent annually, weighed heavily on the headline figure.

Ms Marquardt said petrol price movements 12 months ago are now showing up as volatility in the annual consumer price index, and swinging the annual rate around.

Holiday travel and accommodation prices also fell 11.3 per cent in monthly terms and grew at a softer annual rate compared to April.

Housing was among the top contributors to the annual growth, lifting 8.4 per cent, but was down from 8.9 per cent in April.

Low vacancy rates fuelled another uptick in rents from 6.1 per cent in April to 6.3 per cent in May.

Other top contributors to the annual growth included a 7.9 per cent jump in food and non-alcoholic beverage prices, led by a rise in meals and takeaway food.

Ms Marquardt said the decline in inflation was more modest when volatile items such as automotive fuel, holiday travel and fruit and vegetables were stripped out.

The bureauā€™s measure of underlying inflation, calculated by removing volatile items, fell to 6.4 per cent in May which is slightly lower than the rise of 6.5 per cent recorded in April.

Barrenjoey chief economist Jo Masters said the headline number came in well below market expectations but there were some concerning details likely to weigh on the Reserve Bankā€™s July cash rate decision next week.

For example, she said rents lifted by more than expected and services inflation accelerated by more than anticipated, across utilities, insurance and rents.

ā€œAnd these are items where prices almost never fall, so they take a very long time to come out of the inflation data.ā€

The economist said she was leaning towards another hike.

The central bank has handed out four percentage points of rate increases since April last year in an attempt to pull inflation back within its two-three per cent target range.

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Poppy Johnston
(Australian Associated Press)

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