Monthly CPI data show that energy prices pushed up headline inflation in Australia more sharply than anticipated in May to 4.0 percent from 3.6 percent in April, above the consensus forecast of 3.8 percent. This is the third consecutive increase in headline inflation and takes the level further above the Reserve Bank of Australia's target range of 2.0 percent to 3.0 percent. This monthly indicator measures the year-over-year change in the CPI index compared with the same month twelve months earlier.

Higher headline inflation in May was largely driven by energy costs, with the year-over-year increase in automotive fuel prices accelerating from 7.4 percent to 9.3 percent and electricity prices increasing 6.5 percent on the year after a previous increase of 4.2 percent. Excluding the impact of government rebates, electricity prices would have risen 14.5 percent on the year, up from a previous increase of 13.9 percent. Clothing prices and holiday and travel accommodation charges also rose at a faster pace, partly offset by smaller price increases for food and communication.

Today's data show mixed moves in underlying price pressures in May. The measure of inflation that excludes volatile items including fuel and holiday travel eased from 4.1 percent in April to 4.0 percent in May but the monthly trimmed mean measure rose from 4.1 percent to 4.4 percent.

At the RBA's previous meeting, held last week, officials highlighted uncertainties impacting the inflation outlook and again reiterated that returning inflation to target remains their highest priority. Officials also noted that"recent data have demonstrated that the process of returning inflation to target is unlikely to be smooth". Today's data showing another increase in inflation is likely to reinforce the RBA's reluctance to ease policy and could force officials to consider more seriously an additional rate increase.

Consumer prices in May are expected to rise to 3.8 percent versus a higher-than-expected 3.6 percent in April and 3.5 percent in March.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by households for a fixed basket of goods and services. In Australia, the CPI measures the changes in the price of a fixed basket of goods and services, acquired by household consumers who are residents in the eight State/Territory capital cities. (Darwin, Perth, Sydney, Melbourne, Hobart, Brisbane, Canberra and Adelaide).

Data are released quarterly and, since 2022, monthly. Quarterly inflation data measure the year-over-year change in the index relative to the same quarter twelve months previously. Monthly inflation data measure the year-over-year change in the index relative to the same month twelve months previously.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as Australia, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments. Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Reserve Bank of Australia generally follows the annual change in the consumer price index. It has an inflation target of 2 percent to 3 percent. The RBA also has two preferred core or analytical measures - the weighted and trimmed means. The trimmed mean is a method of averaging that removes a small percentage of the largest and smallest values before calculating the mean. After removing the specified observations, the trimmed mean is found using an arithmetic averaging formula. The weighted mean excludes certain items from the CPI basket (the exclusion approach). Typically, the excluded items are those that are volatile and/or display pronounced seasonal patterns, and those that are subject to administrative price setting.