Australia CPI set to show inflation accelerated again in May

What to expect from Australia’s inflation rate data?

Australia’s annual CPI is expected to rise by 4.4% in May after increasing by 4.2% in April, inching close to the near three-year high of 4.6% seen in March. The monthly CPI is seen declining by 0.3% in the same period, following a 0.4% growth reported previously.

The Trimmed Mean CPI inflation is likely to pick up slightly to 3.5% year-over-year (YoY) in May from 3.4%, while the month-over-month (MoM) figure is set to hold steady at 0.3%.

The inflation data release comes after the Reserve Bank of Australia (RBA) held the Official Cash Rate (OCR) at 4.35% last week, pausing after three consecutive rate hikes since the beginning of the year.

The RBA stated that the “board remains focused on ensuring that inflation does not become embedded once the impulse from higher oil prices has passed through.”

“The board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions,” the central bank further noted.

Since the RBA monetary policy meeting, geopolitical tensions have eased somewhat. The United States (US) and Iran struck a peace deal, sending Oil prices sharply lower. That could help alleviate the pressure on Australian inflation in the months ahead.

The divergence between the monthly and annual figures could be justified by a roughly 12% fall in fuel prices over the month amid easing global oil prices and a domestic fuel excise cut, which is set to expire this month.

Meanwhile, new dwelling costs and rents are expected to provide upward pressure on housing inflation.

However, the Trimmed Mean measures will be closely scrutinized to assess whether second-round pass-through from the Middle East energy shock is broadening into the wider services and housing basket.

The RBA closely watches this underlying inflation trend for policy signals.

How could the Consumer Price Index report affect AUD/USD?

AUD/USD is languishing below 0.7000 in the run-up to the inflation showdown, with buyers awaiting a surprise uptick in the annual and monthly Trimmed Mean CPI inflation data to rescue the Australian Dollar.

A softer headline driven by sharply lower fuel prices, but stubbornly high underlying inflation, will keep the RBA on high alert and hopes for rate hikes alive.

On the other hand, easing inflationary pressures in Australia would push back against expectations of the RBA resuming rate hikes late this year, further weighing on the AUD.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical levels for trading AUD/USD on the CPI release.

“The pair is maintaining a bearish near-term bias as it holds beneath the 21-day, the 50-day and the 100-day Simple Moving Averages (SMAs), clustered between 0.7070 and 0.7135. The pair sits only above the 200-day SMA at 0.6855, which acts as the last meaningful layer of trend support, while the Relative Strength Index (RSI) at 32 is approaching oversold territory, hinting that downside momentum is stretched but not yet exhausted.

On the topside, initial resistance is aligned with the 21-day SMA at 0.7077, followed closely by the 100-day SMA at 0.7085, with the 50-day SMA higher up at 0.7136 reinforcing a broader cap on recovery attempts. On the downside, the 200-day SMA at 0.6855 is the key support to watch; a decisive break below this longer-term measure would likely open the door to a deeper bearish extension in the coming sessions”.

(The technical analysis of this story was written with the help of an AI tool.)

Economic Indicator

Consumer Price Index (YoY)

The Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a monthly basis, measures the changes in the price of a comprehensive basket of goods and services acquired by household consumers. The indicator is the primary measure of headline inflation after a new methodology was applied to transition from quarterly to monthly readings, applying to data from April 2024 onwards. The YoY reading compares prices in the reference month to the same month a year earlier. A high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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