Australian consumer price inflation registered a more significant slowdown than anticipated in May 2025, with the core inflation measure reaching multi-year lows, prompting investors to solidify expectations for an imminent interest rate cut by the Reserve Bank of Australia (RBA). According to data released by the Australian Bureau of Statistics (ABS), the monthly Consumer Price Index (CPI) rose by 2.1% in May compared to a year earlier. This figure represents a decrease from 2.4% in April and was below the median forecast of 2.3%. It marks the lowest annual CPI figure since October 2024, as reported by local media.

Crucially, the RBA's preferred measure of underlying inflation, the trimmed mean, also saw a substantial decline. It increased at a slower annual pace of 2.4% in May, falling from 2.8% in April. This is the lowest annual trimmed mean inflation rate recorded since late 2021, specifically November 2021, and brings the measure below the mid-point of the RBA's 2-3% target band, providing comfort to policymakers.

The softer inflation data has intensified expectations for a rate cut. Swaps markets now imply a 92% probability that the RBA will reduce rates by a quarter-point during its policy decision on July 8. This marks an increase from 81% prior to the data release. Several leading financial institutions, including Commonwealth Bank of Australia, Deutsche Bank, and TD Securities, have revised their forecasts, now expecting the next rate cut in July instead of August. UBS has also stated that its expectation for the RBA to hold steady next month is under review.

Economists emphasize the urgency for the RBA to act. Belinda Allen, a senior economist at CBA, noted that the recent data flow should reassure the RBA that a swifter return of the cash rate to a neutral position is both manageable and necessary. She added that maintaining current restrictive settings for too long risks inflation undershooting the target midpoint. Krishna Bhimavarapu, APAC economist at State Street Global Advisors, expressed conviction that the RBA needs to cut rates in July to safeguard economic growth, as inflation is clearly no longer a primary concern. He highlighted faint consumption and growth signals for Q2, suggesting that a front-loaded cut in July would be beneficial.

The RBA has already implemented two interest rate cuts since February, bringing the rate to 3.85%, leveraging cooling inflation to address rising global trade risks. However, the Australian economy showed minimal growth in the first quarter, as consumers remained cautious due to heightened worries about the economic impact of U.S. tariffs and ongoing geopolitical conflicts. Despite this, the labor market has demonstrated resilience, with the unemployment rate remaining low at 4.1% and job advertisements stabilizing above pre-COVID levels. Wage growth has also been well-behaved, with private sector growth largely subdued.

Analysis of specific components of the CPI reveals further details. The monthly CPI fell by 0.4% from April, largely attributed to easing petrol prices and cooling housing costs. Annually, automotive fuel prices declined by 10%, reaching their lowest level since September 2022. Rents, while still rising, saw their annual growth slow to 4.5% in May, the lowest since December 2022, down from 5.0% in April. Services inflation slowed to an annual rate of 3.3% from 4.1% in the previous month. New dwelling prices remained flat for the month, and holiday travel and accommodation prices fell by 7% after a 6% rise in April. Conversely, the biggest contributors to annual CPI growth were food and non-alcoholic beverages (up 2.9%), housing, and alcohol and tobacco. These rises were partially offset by a 5.9% decline in electricity prices over the 12 months, driven by government rebates. Overall, the data strengthens the case for further monetary policy easing from the RBA, with investors anticipating a total easing of 78 basis points by the end of the year.