Inflation cools, RBA facing 'uncomfortable trade-off'

The Consumer Price Index (CPI) rose 4% in the 12 months to May 2026, according to the Australian Bureau of Statistics (ABS).

"Annual CPI inflation in May was 4%, down from 4.2% in the year to April," ABS head of prices statistics Rachael McCririck said.

"Trimmed mean annual inflation was 3.6% in the 12 months to May 2026, up from 3.4% in the 12 months to April 2026."

VanEck head of investments and capital markets Russel Chesler said inflation is "no longer just sticky" but rather it is "starting to look stubborn".

"While today's fall in headline inflation to 4% is encouraging, what is worrying and presents a real warning sign, is the trimmed mean inflation lifting from 3.4% to 3.6%. That is moving in the wrong direction and further away from the Reserve Bank of Australia's (RBA) 2% to 3% target band," Chesler said.

"The RBA now faces an increasingly uncomfortable trade-off. We do not expect today's rise in trimmed mean inflation to be enough to force another hike in August 2026, but the case for easing has become harder to make.

"GDP growth is weakening, unemployment has risen to 4.5%, households are running down savings buffers, and spending is already outpacing disposable income."

Chesler added the risk of stagflation is now at the forefront especially as auction clearance rates and consumer sentiment have dropped.

"Inflation is proving difficult to bring down at the same time the economy is losing momentum," he said.

"That may not mean recession, but it does mean investors should be careful about assuming the next phase will be easy. We think the terminal rate for this cycle is either the current 4.35%, or 4.6% if the RBA is forced to move once more later this year."

Deloitte Access Economics partner Stephen Smith said the RBA will be cautious about over-interpreting the slight cooling of inflation.

"The Reserve Bank is already dealing with a difficult mix of softening growth and elevated inflation. The economy slowed sharply in the March quarter, households are cautious, and the labour market is cooling," Smith said.

"That may normally suggest the central bank needs to be patient. But with underlying inflation now above the 2.5% target for almost five years, today's result means the Reserve Bank must remain vigilant."