Australian consumer price inflation slowed more than expected in May, while the closely watched core measure eased to three-and-a-half-year lows in a boost to the case for a rate cut just next month.
The slowdown in the core gauge prodded investors to ramp up bets for a rate cut from the Reserve Bank of Australia in July to 90%, from 81% before. For all of 2025, another three rate cuts have been fully priced in.
Three-year bond futures rose 2 ticks to 96.74, while the Australian dollar held earlier gains of 0.2% at $0.6504.
Data from the Australian Bureau of Statistics on Wednesday showed the monthly consumer price index (CPI) rose 2.1% in May compared with a year earlier. That was down from 2.4% in April and under median forecasts of 2.3%.
In the month, CPI fell 0.4% from April as petrol prices eased and housing costs cooled.
The trimmed mean measure of core inflation increased by an annual 2.4% in May, coming under the mid-point of the 2-3% target band. That was down from 2.8% in April and also the lowest reading since late 2021.
A measure excluding volatile items and holiday travel dipped to 2.7%, from 2.8%.
"We are convinced that the RBA needs to cut in July to safeguard growth as inflation is clearly out of their way now," said Krishna Bhimavarapu, APAC economist at State Street Global Advisors.
"We are tracking faint consumption and growth in Q2, and hence, the bank may do well to frontload the cut to July."
The RBA has cut interest rates twice since February to 3.85% as cooling inflation at home offered scope to counter rising global trade risks. However, economic growth has remained subdued as consumers stayed frugal, with U.S. tariffs and geopolitical conflicts darkening the economic outlook.
The labour market has proved to be resilient. The unemployment rate remains low at 4.1% and job advertisements are stabilising above pre-COVID levels. Wages have been well-behaved, with growth in the private sector mostly subdued.
Wednesday's report showed services inflation slowed to an annual rate of 3.3%, from 4.1% the previous month, while rents rose 4.5%, the lowest annual growth since December 2022.
New dwelling prices were flat in the month, while holiday travel and accommodation prices fell 7% after a 6% rise in April, which was driven by holiday demand.
