Australia’s inflation picture has delivered a fresh headache for the Reserve Bank, with headline inflation easing but underlying price pressures rising ahead of the RBA’s crucial August rates decision.

New Australian Bureau of Statistics data shows annual headline inflation slowed to 4.0% in May, down from 4.2% in April, largely due to lower fuel prices and the Federal Government’s temporary halving of the fuel excise.

Automotive fuel prices fell 11.9% in May after a 7.0% fall in April, helping drag the headline figure lower.

However, the RBA’s preferred measure of inflation, the trimmed mean, rose to 3.6% annually, up from 3.4% in April. The measure strips out volatile price moves and is closely watched by the central bank when setting interest rates.

The figures have kept alive the prospect of another rate rise when the RBA next meets in August. The cash rate is currently 4.35%, after three rate increases so far this year.

Economists said the rise in underlying inflation showed cost pressures were broadening beyond fuel and energy.

The concern for the RBA is that underlying inflation was already climbing before the latest energy shock, rising from 2.8% in June 2025 to 3.3% in January, before reaching 3.6% in May.

That suggests price pressures are not solely the result of temporary fuel moves, but are being pushed through the broader economy by businesses facing higher costs.

Housing remained the largest contributor to inflation, rising 6.5% over the year, driven by higher electricity costs, rents and new dwelling prices. Food and non-alcoholic beverages rose 3.3%, while transport costs also increased 3.3%.

Treasurer Jim Chalmers welcomed the fall in headline inflation, describing the result as “very welcome”, but acknowledged inflationary pressures remained across the economy.

The mixed inflation result came as the Australian sharemarket traded cautiously higher, with investors balancing rate concerns against a rebound in local technology stocks.

WiseTech Global surged after sharp falls earlier in the week, while Xero, Technology One and NEXTDC also gained ground. The rebound followed heavy selling in global technology and AI-linked stocks on Wall Street, where the Nasdaq fell 2.2%.

Higher interest rates remain a key risk for technology valuations, as investors reassess growth stocks in a more expensive funding environment.

The Australian dollar was little changed around US69 cents following the inflation release.

For retailers, the latest inflation figures point to a difficult second half. While lower fuel prices may provide some short-term relief, rising underlying inflation and the threat of another rate hike are likely to keep consumers cautious.

Big-ticket tech purchases, appliances and discretionary electronics could face pressure as households prioritise essentials, forcing retailers to lean harder on promotions, value bundles and margin management.

The RBA has warned inflation remains too high and has signalled it is prepared to lift rates again if price pressures become entrenched.