Australia’s inflation rate eased to 4.0 per cent in the year to May 2026, down from 4.2 per cent in April, broadly in line with expectations that inflation is settling around the 4 per cent mark. 

 

The latest figures from the Australian Bureau of Statistics (ABS) reinforce a defining theme this year - the descent is proving more delicate than the climb.

 

Price pressures are easing, though not evenly. The last stretch back to the Reserve Bank of Australia (RBA) target range is moving in the right direction, albeit slowly. 

 

Ahead of the release, Westpac economists noted recent monthly data points to a slower pace of disinflation after stronger progress through 2024 and early 2025. The latest figures from the ABS show as much. 

 

Westpac retains the view that further cash rate increases are coming, with the next hike likely at the August meeting.

 

A basket of mixed signals

The detail across four core CPI categories shows why inflation still feels high for many households. Two diverging pressures are at play - sticky inflation (housing and services) vs easing pressures (food and fuel).

 

- Housing remains the key driver. Rents are rising - particularly in the larger capital cities - but not as quickly as before. Building costs remain elevated, reflecting earlier pressure in construction, though supply constraints are starting to ease.

- Services are still running firm. Insurance and household services continue to lift, reflecting wage and operating costs.

- Food and fuel are easing the pressure. After earlier spikes in essentials like dairy and produce, better supply has helped stabilise food prices, while weaker global oil prices mean fuel is adding less to inflation.

 

Slow progress is still progress

Inflation has come down from its highs, though the final stages are proving harder.

 

Economists point to three key factors:

1. Earlier declines in goods prices are now largely behind us
2. Services inflation tends to adjust slowly
3. Housing costs continue to feed through with a lag

 

This mix explains why the annual rate has steadied around 4.0 per cent rather than continuing to fall quickly.

 

For the RBA, a broad-based easing across both goods and services would provide stronger confidence that inflation is returning to target. 

 

What it means for rates

The latest figures are unlikely to shift the outlook on their own, though they reinforce a cautious stance.

 

Westpac economists have noted that the RBA will be looking for clearer signs that services inflation is easing and that housing-related pressures are moderating more decisively. Until then, the case for moving policy settings is likely to depend on further data.

 

Key signals to watch in coming months include:

- A more sustained slowdown in services inflation

- Further easing in rent growth

- Signs that demand across the economy is softening

 

These trends will shape expectations for when interest rates may begin to adjust.

 

The May CPI confirms that inflation is moving in the right direction, but at two speeds - easing in goods, but proving more persistent in services. In line with Westpac’s expectations, the easier gains have already been made, leaving the more persistent parts of inflation in focus.

 

For now, the path back to the 2 to 3 per cent target range is in sight, but the last mile is proving the longest.

 

For a deeper dive on the May CPI figures, see Westpac IQ.