Australia inflation cools to 4.2% but core pressures keep RBA on alert

Australia's consumer-price growth slowed to 4.2% in April from 4.6% in March, helped by a temporary fuel tax cut, though a rise in underlying inflation kept the Reserve Bank on a tightening path.

"The data suggests the effects of the conflict-driven global energy shock are starting to flow through the Australian economy, adding to price pressures and increasing the risk of another rate hike later this year," Stephen Smith, partner at Deloitte Access Economics, said.

Trimmed mean annual inflation, which strips out volatile items, rose to 3.4% from 3.3%, matching consensus. Housing costs climbed 6.3% from a year earlier, the largest contributor, as electricity prices surged 22.5% after government rebates expired. Transport costs fell 2.7% month-on-month after the federal government halved the fuel excise from April 1, but remained 6.6% higher on the year. Automotive fuel dropped 7% in April, partially reversing March's 33% jump. The Australian dollar pared gains after the release, with traders pricing a reduced probability of a June move.

The RBA has raised the cash rate by 25 basis points three times this year to 4.35%, and markets expect at least one more increase by year-end. The central bank's May statement forecast headline inflation peaking at 4.8% in June, while Treasury sees a 5% peak mid-year. The next board meeting in June is widely expected to deliver a hold, but the August meeting is shaping up as the next live decision point.

The April reading was the first since the fuel excise halving took effect, and the data showed the measure's immediate impact on transport costs. Still, the ABS noted that automotive fuel prices remained 23.5% higher than in February, before the US-Iran conflict sent oil prices soaring. "The impact of higher oil prices has also been seen in products and services with high freight and logistics costs, such as parcel delivery and building materials," Sue-Ellen Luke, ABS head of prices statistics, said. Postal services rose 12.4% and new dwelling construction climbed 4.7% over the year.

The divergence between headline and core inflation presents a challenge for the RBA. The headline figure is trending lower — from 4.6% in March and 3.7% in February — but the trimmed mean measure has now accelerated for two consecutive months. Annual inflation had been on the rise from 1.9% in June 2025 to 3.8% in January even before the energy shock, meaning the central bank was already playing catch-up when the conflict erupted.

The last time Australia's trimmed mean inflation rose above 3.3% was in late 2023, when the RBA responded with a 25-basis-point hike that pushed the cash rate to a then-peak of 4.35%. The current rate matches that level, and the data suggests policymakers may need to go further. Overnight-indexed swaps price roughly 60% probability of a 25-basis-point increase by November, according to pricing data compiled by the market operator.

For households, the stakes are direct. The RBA's three hikes this year have already pushed variable mortgage rates above 7%, and another increase would add roughly A$100 to monthly repayments on a typical A$600,000 loan, based on central bank estimates. Consumer confidence has weakened as a result, with retail spending softening in recent months.

The RBA's next policy decision is on June 16, followed by the August 4 meeting, when updated quarterly economic forecasts will be published. Economists expect the board to hold in June while signaling that further tightening remains possible if inflation does not moderate as forecast.

This article is for informational purposes only and does not constitute investment advice.