Australia's May headline Consumer Price Index (CPI) slowed to 4.0% year-on-year, coming in below both consensus expectations of 4.3% and TD Securities' own forecast of 4.2%. This deceleration was largely attributed to softer transport and fuel costs, with transport rising by 3.3% year-on-year compared to the previous 6.6%, and fuel prices easing to 7.7% year-on-year from 18.6% previously [1]. However, trimmed mean inflation, which is closely monitored by the Reserve Bank of Australia (RBA), edged higher to 3.6% year-on-year, above the consensus of 3.5% and up from 3.4% previously. The month-on-month trend in trimmed mean inflation is also rising, signaling persistent underlying price pressures [1].
TD Securities strategists argue that while the downside surprise in headline inflation keeps the RBA alert to rising inflationary pressures, it does not reduce the odds of an August rate hike. They emphasize that the RBA places greater weight on trimmed mean inflation, and the current trend is not favorable for a dovish policy shift [1].
On the labor market front, TD Securities expects a rebound in Australian employment, forecasting a gain of 40,000 jobs in May compared to the consensus estimate of 30,000. This follows a negative jobs print of -18,600 in April, which was attributed to changes in the Australian Bureau of Statistics' Labor Force Survey collection system and the timing of the long Easter holidays, potentially causing temporary distortions [1]. The unemployment rate is expected to edge lower to 4.4%. However, TD Securities warns that weak consumer sentiment and lower capacity utilization could push the unemployment rate higher in the coming months [1].
CONCLUSION
Australia's softer headline inflation provides some relief, but persistent core inflation keeps the RBA on alert for further tightening. While a jobs rebound is expected in May, underlying economic risks such as weak consumer sentiment and lower capacity utilization could challenge the labor market outlook. The odds of an August rate hike remain unchanged according to TD Securities.