Australia is experiencing a significant easing in inflation, paving the way for the Reserve Bank of Australia (RBA) to implement official interest rate cuts in the coming weeks. Monthly data from the Australian Bureau of Statistics (ABS) revealed a notable deceleration, with headline inflation easing to 2.1 per cent annually in May, and underlying inflation reaching its lowest point in almost three years. This positive trend has led major financial institutions, including the Commonwealth Bank (CBA), to forecast successive rate reductions in July and August, followed by potentially more relief for households and businesses.

The overall price level actually saw a 0.4 per cent decline in May, a development acknowledged by Treasurer Jim Chalmers, who noted significant progress against inflation, exceeding initial expectations. A primary driver of this disinflationary trend has been the housing sector. Construction inflation, which peaked at nearly 22 per cent in July 2022 and stood at 4.9 per cent in May last year, has now dramatically tumbled to just 0.8 per cent—its lowest rate in five years. This decline is attributed to builders offering incentives to attract new customers in a competitive market.

Beyond construction, rental inflation also showed considerable easing, dropping to an annual rate of 4.5 per cent in May. This marks its fifth consecutive monthly decline and its lowest rate since early 2023. Food inflation followed suit, easing to 2.9 per cent in May from 3.1 per cent in April, largely driven by a sharp fall in fruit and vegetable prices. Specific items like mandarins, oranges, avocados, and apples saw significant price drops. Furthermore, insurance costs, a major burden on consumers over the past three years with peaks of 16.5 per cent, fell to an annual rate of 3.9 per cent in May, with monthly prices declining by half a percentage point.

The slowdown is broad-based, with prices for services growing at their slowest rate in three years, and more than half of all sectors tracked by the ABS reporting inflation below 2 per cent. Despite these encouraging signs, some price pressures persist, often stemming from factors beyond the direct control of monetary policy. For instance, egg prices have climbed over 19 per cent due to poultry producers recovering from avian flu-related culls, while lamb prices increased 12.7 per cent due to drought conditions impacting the national flock.

Financial markets have reacted swiftly to the benign inflation figures. The probability of an interest rate cut at the RBA’s July meeting soared from 86 per cent before the data release to 94 per cent afterwards. Economists are largely in agreement that conditions are ripe for easing. Belinda Allen, a senior economist at CBA, reiterated that the recent economic data confirms well-contained inflation pressures, clearing the path for the RBA to swiftly return the cash rate to a more neutral level, potentially around 3.35 per cent. She emphasized the risk of inflation undershooting the target if restrictive settings are maintained for too long.

Cherelle Murphy, EY chief economist, highlighted that with underlying inflation now consistently within the RBA’s 2-3 per cent target band for the past six months, the central bank can confidently proceed with rate cuts without concerns of reigniting price increases. Similarly, Krishna Bhimavarapu, APAC economist at State Street Global Advisors, asserted the necessity of a July cut to safeguard economic growth, given the clear moderation of inflation and faint consumption growth in the second quarter. While AMP economists anticipate a series of cuts extending into early 2026, RSM Australia economist Devika Shivadekar suggested the RBA might prefer to await comprehensive Quarterly 2 CPI data later in July before making a move, unless the May figures are deemed sufficient to confirm a sustained disinflationary trend.

This positive inflation outlook arrives amid a broader economic context of weak growth and sliding consumer and business confidence, even as the labour market remains resilient with an unemployment rate of 4.1 per cent and stable job advertisements. Wages have also been well-behaved, with growth in the private sector largely subdued. Investors are now anticipating a total easing of approximately 78 basis points by the end of the year, underscoring the shift towards a more accommodative monetary policy stance in Australia.