Australia’s headline inflation rate eased to 4.2% in April, coming in below market expectations as the federal government’s temporary fuel excise cut helped dampen petrol prices, but underlying inflationary pressures remain stubborn and are likely to keep the Reserve Bank of Australia (RBA) firmly on alert.
New data released by the Australian Bureau of Statistics (ABS) on Wednesday showed annual consumer price inflation slowed from 4.6% in March and below economists’ forecasts of 4.4%.
The moderation was largely driven by a 7% fall in fuel prices after the Albanese government halved the fuel excise from April 1, reducing the tax to 26.3 cents per litre in a move designed to ease cost-of-living pressures amid surging global oil prices.
However, the RBA’s preferred measure of underlying inflation – the trimmed mean – edged higher to 3.4% from 3.3%, highlighting persistent domestic price pressures once volatile items such as fuel are stripped out.
Underlying inflation remains sticky
The ABS said housing costs rose 6.3% over the year while transport costs climbed 6.6%, with electricity prices lifting as government energy rebates expired.
The bureau also warned higher oil prices linked to escalating Middle East tensions were beginning to flow through broader parts of the economy, particularly sectors with heavy freight and logistics exposure. Postal services rose 12.4% annually while new dwelling construction costs increased 4.7%.
Pitcher Partners chief investment officer Cameron Curko said the decline in headline inflation was heavily influenced by temporary government intervention rather than a sustained easing in price pressures.
“The headline deceleration was partially driven by the Government’s halving of the fuel excise duty,” Curko said.
“This is temporary and we need to see permanent progress in the Middle East for this pressure to abate.”
Curko said higher energy costs continued to feed through to housing construction and essential services, with health and education inflation remaining elevated at 4% and 4.8% respectively.
RBA likely to hold in June
The softer-than-expected headline CPI print has strengthened expectations the RBA will leave the cash rate unchanged at 4.35% at its June meeting, despite concerns around sticky core inflation.
Economists across Australia’s major banks already expected the central bank to remain on hold following three consecutive rate hikes earlier this year.
Curko said the latest figures likely “buy the RBA time” ahead of its next policy decision but warned the central bank’s inflation battle was far from over.
“The negligible improvement in core inflation measures makes subsequent rate hikes a real possibility in our view,” he said.
“This is because persistent core inflation above 3% makes it unlikely we will see headline inflation subside into the target 2-3% range.”
VanEck head of investments and capital markets Russel Chesler said the headline figure understated the broader inflation challenge facing policymakers.
“The headline number does not tell the full story,” Chesler said.
“Underneath the surface, however, inflation remains stubborn.”
Chesler said the rise in trimmed mean inflation was unlikely to trigger another immediate rate hike in June, but warned the RBA could still tighten further later in the year if inflation pressures persist.
“Our view remains that the terminal rate for this hiking cycle is either the current cash rate of 4.35%, or possibly 4.6% if the RBA delivers one more hike later this year,” he said.
Wage growth emerging as key risk
Analysts also pointed to wages as an increasingly important variable for the inflation outlook, particularly ahead of the Fair Work Commission’s upcoming minimum wage decision.
Chesler warned wage increases above 4% risked creating broader inflationary spillovers across the economy.
“Keeping wage growth under control will be critical if Australia is to avoid a more entrenched inflation problem,” he said.
The Fair Work Commission is expected to hand down its decision in June, with some groups lobbying for a wage rise as high as 6%.
BNY APAC macro strategist Wee Khoon Chong said the April inflation data delivered a “mixed signal” for markets and policymakers.
“The data should reinforce a status quo outcome at the June RBA meeting, while still leaving the door open to further tightening in 2H26,” Chong said.
“Markets currently price a terminal rate of around 4.60% by year-end, implying one additional 25bp hike.”
Australian dollar holds firm
Currency markets showed only a muted reaction to the inflation release, with Chong noting the Australian dollar weakened slightly immediately after the data but remained well supported overall.
“Overall, we remain constructive on the AUD outlook,” he said.