Australia May CPI preview: fuel drag to mask sticky underlying inflation
The AUD and Australian rate futures will be sensitive to any upside surprise in the trimmed mean, which is the measure the RBA watches most closely for policy signals. All three banks broadly agree that the annual trimmed mean will edge higher in May, ranging from 3.5% to 3.6%, and a print above that range would reinforce the case for the RBA to hold rates at its next meeting or lean further toward a hike. The headline number is expected to move in the opposite direction to the underlying, falling month-on-month due to fuel, which creates a communication challenge: the RBA and financial markets will need to look through the softer headline to assess whether second-round pass-through from the Middle East energy shock is broadening into the wider services and housing basket. New dwelling costs are a specific upside risk flagged by both CBA and Westpac, with construction pipeline pressures and data centre build-out competing for labour and materials. A fuel excise extension, if confirmed in coming weeks, would complicate the Q3 inflation picture further.
Australia’s May monthly CPI, due Wednesday at 11:30am AEST, is expected to show headline inflation edging higher annually despite a sharp fuel-driven monthly fall, with trimmed mean seen rising to around 3.5-3.6%yr.
Summary:
- Australia’s May monthly CPI is scheduled for release at 11:30am AEST on Wednesday June 24, with NAB and Westpac forecasting annual headline inflation to rise to 4.4%, while CBA expects a slight easing to 4.1%, according to preview notes from each institution
- All three banks expect fuel prices to be the dominant drag on the monthly outcome, with a decline of approximately 12-15% in automotive fuel prices in May subtracting meaningfully from the headline monthly figure, per the preview notes
- Trimmed mean inflation, the RBA’s preferred underlying measure, is forecast to rise on an annual basis by all three banks: NAB forecasts 3.5%yr, CBA 3.5%yr, and Westpac 3.6%yr, according to their respective previews
- New dwelling costs and rents are expected to provide upward pressure on housing inflation, with CBA forecasting new dwelling costs to rise 0.9%mth in May, which would lift annual new dwelling inflation to 5.6%yr, its fastest since July 2023, per its preview note
- Westpac flagged that construction cost pipeline pressures and competition for labour and materials from data centre build-out could drive new dwelling inflation higher than forecast in coming months, according to its preview
- Key upside risks cited across the three banks include faster-than-expected pass-through of higher input costs into consumer prices, while the main downside risk is that firms absorb a larger share of cost increases given weak non-fuel consumer spending and deeply pessimistic business sentiment, per the preview notes
- NAB noted that a quarterly average fall in fuel prices means headline CPI on a Q2 basis is tracking comfortably below the RBA’s May Statement on Monetary Policy forecast of 4.8%yr, per its preview
Australia’s monthly CPI indicator for May is due at 11:30am AEST on Wednesday, June 24, and the consensus view from the country’s major bank economists points to a release that will tell two different stories depending on which number you look at: a softer headline driven by sharply lower fuel prices, and a firmer underlying picture that will keep the Reserve Bank of Australia on high alert.
- 0130 GMT / 2130 US Eastern time (on Tuesday)
The divergence between the headline and core readings reflects the dominant influence of automotive fuel prices in May. Fuel fell by approximately 12-13% over the month as global oil prices eased and the domestic fuel excise cut remained in place. That decline is expected to subtract significantly from the monthly outcome and in the case of CBA push the annual headline rate modestly lower, to 4.1%, even as the year-on-year comparison base produces an annual lift to 4.4% in Westpac’s and NAB’s forecasts. The fuel excise cut is currently scheduled to expire at the end of June, with discussions ongoing around a potential three-month extension; Westpac estimates that if extended and matched by state government contributions, it could subtract around 0.5 percentage points from headline inflation in the third quarter, though the direct impact on trimmed mean would be negligible.
Stripping out fuel and other volatile items, the picture is considerably less comfortable. All three banks are forecasting the annual trimmed mean to edge higher in May, from 3.4% in April to approximately 3.5% to 3.6%. NAB and CBA both forecast 3.5%yr, while Westpac sits at the top of that range at 3.6%yr. On a monthly basis, trimmed mean is expected to come in at 0.3% to 0.4%, consistent with a quarterly pace that remains well above the RBA’s 2-3% target band. Market services inflation is estimated at around 3.7%yr by CBA, with Westpac’s measure of market services excluding volatiles expected to be flat month-on-month, rising 0.2% when both volatiles and holiday travel are excluded.
Housing will be a key sub-component to watch. Rents are expected to rise 0.3%mth, a modest acceleration from the 0.2% pace of the prior two months that had been partially dampened by increases in Commonwealth Rent Assistance. New dwelling costs are a more contested variable: CBA forecasts a rise of 0.9%mth in May, which would lift annual new dwelling inflation to 5.6%yr, its fastest pace since July 2023. Westpac is slightly more conservative at 0.5%mth but flags that pipeline construction cost pressures, including competition for labour and materials from the accelerating build-out of data centres, are likely to sustain upward pressure on new dwelling inflation in the months ahead.
Food prices are expected to provide a modest offset to the fuel drag, with a rebound in fruit and vegetables after unexpected softness in April cited by Westpac as the primary driver of a 0.7%mth food gain. NAB flagged international travel prices as a potential wild card, noting that an unseasonally strong travel outcome is embedded in its forecast and that the data on international airfares remains particularly difficult to predict with precision.
The broader question the May release will attempt to answer is whether second-round pass-through from the Middle East energy shock is broadening beyond fuel and transport into the wider consumer basket. CBA noted that the more severe inflation scenarios discussed in the immediate aftermath of the conflict have so far not materialised, with the April data showing pass-through more limited than anticipated across the broader CPI basket. That said, purchase cost growth among businesses remains elevated, selling price expectations are above long-run averages, and the RBA itself noted in its post-meeting statement that some firms are already passing higher costs on to consumers while others have signalled an intention to do so.
The risk distribution around Wednesday’s release is broadly asymmetric to the upside on trimmed mean. CBA’s Monte Carlo simulations suggest the probability of trimmed mean coming in above its 3.5%yr central forecast is just over 45%, while the probability of an undershoot is under 20%. For the RBA, a trimmed mean reading at or above the top of the bank forecasts would add to the case for maintaining the current hawkish posture, while a softer-than-expected outcome, particularly if combined with evidence that firms are absorbing rather than passing on costs, might provide some modest reassurance that the disinflation process remains intact.
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Note, later in the day, speech by Andrew Hauser, Deputy Governor of the RBA:
- ‘Sir Douglas Copland Lecture’ at the Economic Society of Australia (Victoria)
- The lecture focuses on theoretical issues for an academic audience and will not include discussion of live monetary policy issues; as such there is no livestream or Q&A.
This article was written by Eamonn Sheridan at investinglive.com.