Inflation takes a welcome dive but experts divided

The inflation rate has fallen again, this time more than expected, but economists don’t expect the Reserve Bank to be too excited.

The inflation rate for the 12 months to May was 5.6 per cent. The market was expecting it to be above 6 per cent so it was significantly better, but economists were reading differing meanings to the figures.

“From here, we are either sailing into the sunset with Goldilocks at our back, with strong employment and tame inflation, or, into the red fires of Mordor. Nothing in between for the Aussie outlook,” according to Aequitas Investment Partners’ David Berthon-Jones.

ANZ said it was a “large deceleration” though underlying measures were less encouraging.

It retains a view that interest rates will increase in July and August.

AMP said there was now an option for a pause in hikes at the next meeting, but said inflation was still too high and more rate hikes were needed.

Significantly, the inflation rate was the lowest increase since April last year and at an annualised quarterly inflation rate is sitting at 3.2 per cent.

“While prices have kept rising for most goods and services, many increases were smaller than we have seen in recent months,” the ABS said.

Excluding the volatile items, inflation was at 6.4 per cent, slightly down from 6.5 per cent.

The most significant contributors to the annual increase in the monthly CPI indicator in May were housing (+8.4 per cent), food and non-alcoholic beverages (+7.9 per cent), and furniture, household equipment and services (+6 per cent). Partly offsetting the rise was a fall in automotive fuel (-8 per cent).

Rents are still running hot at 6.3 per cent, up from 6.1 per cent in April, but new dwelling purchases went the other way and have been heading south since October.

Economist Stephen Koukoulas said the inflation free fall had been confirmed.

He said the May result of 5.6 per cent was down 2.8 percentage points since December.

The market will be watching Thursday’s job vacancy and retail trade data to get a clearer picture.

“The curious thing is inflation needs to pick up from here over the next seven months for it to end 2023 above 3 per cent. With the economy as weak as a wingless fly, this seems a long shot,” Mr Koukoulas said.

“In [the] first five months of 2023, inflation is 1.2 per cent, 0.24 per cent per month.”

He said the RBA had already hit its target rate and had made “a horrible error with recent hikes”.

This article was first published by InQueensland.