The CPI registered an annual reading of 5.6% in May, down from 6.8% in April. This was the lowest level of inflation since April 2022.

ANZ senior economist Adelaide Timbrell said while the latest reading signalled a moderation, it is still expected for the Reserve Bank of Australia to raise the cash rate in July and August.

“Though given the last two decisions were described by the RBA Board as “finely balanced”, there is a chance the monthly CPI data could shift the RBA to a pause in July.

“This would shift the timing of our forecast peak cash rate of 4.6% but not the level of peak.”

Ms Timbrell noted while the latest CPI reading showed a substantial moderation, underlying measures seem “less encouraging.”

“CPI excluding volatile items and holiday travel — which was a focus in the RBA Board’s June Minutes — showed almost no moderation.

Adding to the case for a cash rate increase in July is the strong labour market — over the three months of May, employment growth was at 143,000 while unemployment rate was at 3.6%.

“Other recent economic data that could offset optimism from the encouraging headline monthly CPI result include the rapid increase in unit labour costs in the year to quarter-one 2023, future increases in electricity prices, and ongoing wage increases,” Ms Timbrell said.

NAB economist Taylor Nugent shared similar thoughts, adding that while the relief on the headline measure is “optically useful”, it would be of little comfort to RBA, especially given its concerns about the persistence of inflation across the stickier parts of the basket.

“The RBA’s recent decisions to increase rates after the April pause have been centred around an assessment of upside risks to inflation from sticky services inflation and shifts in wage and price setting behaviour,” he said.

“NAB continues to expect the RBA to raise rates to 4.6% in coming months, pencilling in July and August.”

“However, the RBA’s bias argues towards a hike in July, though their April instinct to pause in anticipation of a full forecast update and full quarterly CPI before delivering a hike in May is a precedent that makes July less certain.”

As of press time, CommBank and Westpac economists have yet to update their RBA rate forecast that takes into account the latest inflation reading.