Australia’s labour market has strengthened and household spending has rebounded more sharply than expected, adding to evidence that the economy may not be slowing enough to bring inflation back to target and keeping another Reserve Bank of Australia (RBA) rate rise in play.
The unemployment rate fell to 4.4% in May, down from 4.5%, while the economy added 40,300 jobs, ahead of economists’ expectations for 32,500 new positions.
At the same time, Australian Bureau of Statistics (ABS) data showed household spending rose 1.3% in May, reversing a 1.1% fall in April and well above expectations for a 0.5% gain.
The spending result was driven by stronger outlays on hotels, cafes, restaurants and clothing, suggesting consumers remain active despite cost-of-living pressure, elevated interest rates and weaker savings.
Spending rebound challenges RBA slowdown narrative
ABS head of business statistics Tom Lay said the May result represented a broad-based recovery in household spending.
“The rise in household spending largely reversed what was seen in April, reflecting a lift across all nine spending categories,” Lay said.
“Annual household spending increased by 5.5% compared to May 2025, up from the 5.1% annual rise in April.”
The figures matter for Australians because resilient spending can keep pressure on prices, particularly in services and discretionary categories, making it harder for the RBA to declare victory over inflation.
The RBA held the cash rate at 4.35% this month after 3 consecutive 0.25-percentage-point increases this year, but the latest data reinforces the case for an extended period of restrictive policy.
Jobs market still historically strong
The labour market also remains stronger than the RBA had expected, with the May jobless rate above the central bank’s May forecast for 4.2% in June but still low by historical standards.
The 40,300 jobs added in May included around 5,000 full-time roles and 35,000 part-time positions.
Treasurer Jim Chalmers said the figures showed the economy remained resilient.
“This is a very welcome reminder of the strength of our labour market and the resilience of our economy in the face of all this global uncertainty,” Chalmers said.
Youth unemployment, which had risen sharply in April after 56,400 people aged 15 to 24 lost work, fell to 10.4% in May.
Inflation risk keeps another rate rise on table
The labour and spending data followed ABS inflation figures showing trimmed mean inflation — the RBA’s preferred underlying measure — rose from 3.4% to 3.6% in May.
That combination of stronger employment, resilient spending and sticky inflation has sharpened market focus on whether the RBA may need to tighten again before year-end.
State Street Investment Management APAC economist Krishna Bhimavarapu said the data supported the RBA’s wait-and-see approach but did not remove the risk of another hike.
“The labour market bouncing back against yesterday’s mixed inflation report allows the RBA to remain on an extended hold. However, the bigger risk is still sticky inflation that precludes it from coming back into the target zone. For this reason, we continue seeing a possibility of another hike later in the year. However, as the cash rate remains elevated for longer, the labour market may gradually loosen with the unemployment rate potentially inching towards our 4.8% forecast.”
BNY APAC Macro Strategist Wee Khoon Chong said the numbers showed the economy remained too resilient for policymakers to relax.
“Australia’s May jobs data continued to show strength, with the unemployment rate easing to 4.4%. Also noteworthy is resilient household spending, up 5.5% y/y.
“The overall message from today’s jobs data and elevated inflation pressures is that there is no room for complacency. The Australian economy remains resilient.
“Similar to yesterday’s inflation data, the numbers are unlikely to shift the RBA from its current wait-and-see stance in the near term, though they reinforce the view that further policy tightening remains possible before year-end.
“The AUD is relatively unchanged, with the US dollar remaining the dominant driver.”
“Mixed signals at exactly the wrong time”
VanEck head of investments and capital markets Russel Chesler said the latest figures complicated the inflation outlook for the RBA.
“This is not the clean slowing signal markets were hoping for. Employment rose by 40,300 in May and the unemployment rate fell to 4.4%, at the same time household spending rose 1.3%. For an economy that is supposed to be losing momentum, Australians are still working and still spending,” Chesler said.
“Healthy employment is good but this is the problem: Growth is slowing, household savings are under pressure and consumers are being squeezed, but demand has not cracked. At the same time, underlying inflation is moving the wrong way, with trimmed mean inflation rising to 3.6% in May. That combination keeps the inflation fight alive and puts another rate rise back on the table.
“We remain data dependent, but our view is that there could be up to one more increase in this cycle. The next inflation print will be critical. If employment remains resilient and consumers continue spending despite weaker growth and lower savings, the RBA may have little choice but to tighten again. This is not an economy rolling over, it is an economy sending mixed signals at exactly the wrong time,” Chesler said.
Retailers see selective consumers
For households, the data suggests cost pressures have not stopped spending altogether, but consumers are becoming more selective about where their money goes.
Shopify managing director APAC and Japan Shaun Broughton said the May increase pointed to continuing demand, particularly in discretionary categories.
“May’s increase suggests Australians are continuing to spend despite ongoing cost of living pressures, with discretional spending likely driving much of the month-to-month volatility we’re seeing in household spending. Such fluctuations indicate consumers haven’t switched off from retail altogether; they’re simply becoming more selective about where and how they spend their money.
“That’s the reality of retail in today’s environment. Demand hasn’t disappeared, but winning a share of consumer spending has become increasingly competitive. Retailers that can clearly articulate their value proposition, offer compelling promotions and deliver a seamless customer experience will be best placed to outperform, even as households remain cautious.
“With inflation starting to slow, interest rates stabilising and fuel price pressures easing, retailers may finally have some room to breathe. Next month’s June data could deliver another uplift in spending, driven by an EOFY sales period that value conscious consumers are likely to have been anticipating.”
The RBA’s next board meeting is scheduled for August 11, with policymakers likely to place more weight on the next inflation update than a single month of employment data.
However, with unemployment at 4.4%, household spending up 1.3% month-on-month and underlying inflation at 3.6%, the latest figures suggest the RBA has little room to soften its stance.