Australia’s Inflation Slows Sharply in May, Boosting Rate Cut Expectations

Australia’s consumer price index (CPI) inflation eased more than expected in May, reinforcing expectations of further interest rate cuts by the Reserve Bank of Australia (RBA).

Data from the Australian Bureau of Statistics showed annual headline CPI rose 2.1% in May, down from 2.4% in April and below market forecasts of 2.3%. This marks the slowest pace of inflation growth in seven months and keeps inflation well within the RBA’s 2% to 3% target range.

Core inflation also showed a notable cooldown. The trimmed mean CPI—a key measure of underlying inflation—slowed to 2.4% from 2.8%, the lowest since November 2021. Additionally, CPI excluding volatile items and holiday travel increased by just 2.7%, compared to 2.8% the previous month.

The decline in inflation was largely attributed to falling electricity prices, supported by ongoing government rebates. However, the broader trend reflects a cooling economy, with sluggish business activity and consumer spending amid ongoing uncertainty.

The soft inflation data strengthens the case for the RBA to continue its monetary easing cycle. The central bank has already cut interest rates by a total of 50 basis points in 2025, bringing the cash rate to 3.85%. Further rate cuts will likely hinge on inflation staying subdued and signs of economic weakness.

Investors and analysts now anticipate a dovish shift in the RBA’s policy stance, especially if inflation remains within the target range and growth risks intensify. The May inflation report adds to growing momentum for additional rate reductions in the coming months.