Australia CPI Preview: May Inflation Likely Accelerated Despite Sharp Monthly Drop in Fuel Prices

The Australian Bureau of Statistics is set to release the monthly Consumer Price Index indicator for May on Wednesday, with analysts expecting the annual inflation rate to have accelerated despite a sharp month-on-month decline driven by temporary fuel excise cuts.

Economists surveyed by Bloomberg forecast the monthly CPI to rise 3.8% year-on-year in May, up from 3.6% in April. The headline figure, however, is expected to mask a volatile monthly movement, with fuel prices falling significantly after the federal government reinstated a temporary reduction in the fuel excise.

Fuel Excise Cut Distorts Monthly Data

The Australian government reduced the fuel excise by 25 cents per litre for six months starting in late May, a move designed to ease cost-of-living pressures. While this caused a sharp drop in petrol prices at the pump — and a corresponding fall in the monthly CPI reading — the base effect from a year ago is expected to push the annual rate higher.

In May 2024, fuel prices were already elevated, meaning the annual comparison will reflect a period before the excise cut took effect. This statistical quirk is likely to be the primary driver of the forecast acceleration in the headline annual figure.

Core Inflation and Services Remain Sticky

Beyond fuel, the underlying inflation picture remains a concern for the Reserve Bank of Australia. The trimmed mean measure, which excludes volatile items, is expected to remain above the RBA’s 2-3% target band, driven by persistent price pressures in services such as rents, insurance, and healthcare.

Rents continue to climb across major capital cities, with vacancy rates near historic lows. Insurance premiums have also risen sharply due to higher reinsurance costs and extreme weather claims. These components are less sensitive to government policy interventions and suggest that underlying inflation may prove stubborn.

Implications for RBA Rate Path

The May CPI print is a key data point for the RBA ahead of its next monetary policy meeting in August. Financial markets have been pricing in a potential rate cut in late 2025, but a higher-than-expected inflation reading could push that timeline further out.

Governor Michele Bullock has repeatedly stated that the board remains data-dependent and will not hesitate to raise rates again if inflation proves persistent. The May data will be scrutinized for signs that the disinflation trend is stalling.

If the annual CPI accelerates as forecast, it may reinforce the RBA’s cautious stance, keeping the cash rate at 4.35% for an extended period. Conversely, a weaker-than-expected reading, particularly in core measures, could revive expectations of an earlier easing cycle.

Conclusion

The May CPI release is likely to show a nuanced picture: a sharp monthly decline in headline inflation thanks to fuel excise cuts, but an acceleration in the annual rate due to base effects and persistent services inflation. For Australian households, the immediate relief at the petrol pump will be welcome, but the broader inflation trajectory remains uncertain. The RBA will be watching closely, and the data will be a critical input for the August rate decision.

FAQs

Q1: Why is annual inflation expected to rise if fuel prices fell in May?
The annual inflation rate compares prices in May 2025 to May 2024. Fuel prices in May 2024 were already high, and the temporary excise cut in May 2025 only affects the current month. The base effect from last year pushes the annual comparison higher, even though monthly prices fell.

Q2: How does the fuel excise cut affect the CPI?
The fuel excise cut directly reduces petrol prices at the pump, which lowers the monthly CPI reading for the transportation category. However, the cut is temporary (six months), so its impact on the annual inflation rate will fade once it expires and prices potentially rebound.

Q3: Will this CPI data change RBA interest rate expectations?
It could. If the annual inflation rate accelerates more than expected, the RBA may delay any potential rate cuts. If core inflation surprises to the downside, markets may price in an earlier easing. The data will be a key factor in the RBA’s August decision.