Yesterday, mortgage holders and ASX share investors received a mixed message on Australia's inflation rate.
On the positive side of the scale, the ABS reported that the Consumer Price Index (CPI) increased by 4.0% in the 12 months to May. That's down from the 4.2% increase in the inflation rate for the 12 months to April.
On the negative side of that scale, the ABS revealed that trimmed mean inflation, which takes out certain volatile items (like fuel), increased to 3.6%. That's up from 3.4% in the 12 months to April and well above the RBA's 2% to 3% target range.
That's important for ASX share investors and mortgage holders hoping for interest rate relief, as the trimmed mean number is the RBA's preferred gauge.
As you're likely aware, Aussies have already had to contend with three interest rate increases from the central bank in 2026. While the RBA kept rates on hold at 4.35% at its last meeting on 16 June, this still sees the official interest rate back at their 2024 peak, and matching the highest level since 2011.
So, what can we expect from interest rates now?
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What the experts are saying on the inflation rate and the RBA
Commenting on the latest inflation rate numbers, Ebury economist Anthony Malouf said, "May CPI data was weaker than expected at the headline level… However, the headline figure is heavily distorted by the ongoing unwind of automotive fuel prices, which have fallen over the past two months."
As for what this might mean for Australia's interest rates, Malouf said:
More concerning for the RBA, trimmed mean inflation surprised to the upside, rising 0.4% MoM with the annual rate lifting to 3.6% from 3.4% in April, suggesting underlying inflation continues to firm…
We maintain our view that the cash rate remains on hold at 4.35% through 2026 and into 2027.
CreditorWatch chief economist Ivan Colhoun has a more hawkish view on what we might expect from the RBA's rate-setting path.
According to Colhoun:
There was some good news in today's CPI release with the first reports of some price falls as fuel surcharges were reduced…
However, that still leaves Australia with a labour market inflation problem, with the recent 4.75% national wage case decision likely to sustain price rises at rates nowhere near consistent with the RBA's 2.5% aims. That suggests the Bank isn't finished tightening as yet.
Connecting the dots, Colhoun advised mortgage holders and ASX investors to brace for another rate hike towards the end of the year.
He concluded:
My base case remains of a continuing slow, elongated tightening cycle in Australia, underpinned by the global AI, defence and renewables investment boom, with mining also benefiting. Further tightening remains a significant risk. My expectation is the RBA will continue to observe inflation and the economy for a while longer and next tighten in November.
And we'll leave off with BNY APAC macro strategist, Wee Khoon Chong, who said the latest inflation rate data leaves the door open for another RBA rate hike in 2026.
Chong noted (quoted by the Australian Financial Review):
Markets appear too complacent in assuming the current tightening cycle has peaked. The data is unlikely to shift the RBA from its current wait-and-see stance in the near term.
However, the firmer core inflation reading reinforces our view that further policy tightening remains possible before year end.
Stay tuned!
