Australia Inflation Drops to 4.2% on Fuel Tax Cut

Australia's annual consumer price index (CPI) slowed to 4.2% in April, down from 4.6% in March, according to data from the Australian Bureau of Statistics (ABS). This easing was primarily driven by a government tax cut on fuel, which led to a 7% drop in petrol prices. However, economists warn that underlying inflationary pressures persist, and further interest rate hikes may still be on the horizon.

The decline in petrol prices followed a significant surge of 32.8% in March, triggered by disruptions in global oil supply due to the US-Israel attack on Iran. Despite the recent drop, fuel prices remain 24% higher than pre-conflict levels. The ABS noted that higher oil prices have impacted products and services with high freight and logistics costs, such as parcel delivery and building materials.

The trimmed mean measure of core inflation, which excludes volatile items like fuel, edged up to 3.4%, marking the highest level since late 2024. This figure remains above the Reserve Bank of Australia's (RBA) target range of 2% to 3%. Economists caution that the effects of the conflict-driven global energy shock are beginning to flow through the Australian economy, adding to price pressures and increasing the risk of another rate hike later this year.

The RBA has raised interest rates three times this year to 4.35% in an effort to tame inflation. The unemployment rate unexpectedly climbed to a 4-1/2 year high of 4.5% in April, which may indicate that the labor market is loosening enough to stave off further rate hikes. However, markets are still pricing in one more rate increase by the end of 2026.