A mixed consumer price report, released by the Australian Bureau of Statistics on Wednesday, was softer and stronger than forecasters had predicted.
But the most critical number - the annual trimmed mean - would give the Reserve Bank the justification it needs to raise interest rates again, KPMG chief economist Brendan Rynne said.
The core inflation measure, which strips out volatile items and is more closely watched by the RBA, edged up to 3.6 per cent in May, from 3.4 per cent a month earlier.
The result was above the consensus estimate of forecasters, who had pencilled in a rise to 3.5 per cent.Â
Headline inflation fell to four per cent annually, from 4.2 per cent in April.
Economists were expecting a slight increase.
"Unfortunately today's data adds to the case for a rate hike," Dr Rynne said.
Treasurer Jim Chalmers had a more optimistic take.
"This is a very welcome set of numbers, which shows that inflation fell once again for the second month in a row," he told reporters.
The fall in the headline figure was driven by an 11.9 per cent dip in fuel prices for the month.
Despite the Strait of Hormuz remaining largely shut to maritime freight during May, oil prices eased after an initial spike at the start of the Middle East conflict.
The government's decision to temporarily halve the fuel excise contributed to lower petrol and diesel prices.
Prices will rise from July 1 as the excise cut is wound back.
Housing costs were the largest pressure on inflation, up 6.5 per cent in the 12 months to May.
They are closely watched by the central bank because they make up a large proportion of the consumer price basket and tend to be fairly sticky.
The figure reflected rising costs for electricity, new dwellings and rents, ABS head of price statistics Rachael McCririck said.
"Electricity costs are 21.1 per cent higher than 12 months ago as commonwealth and state government rebates that reduced electricity costs for households are no longer in place," she said.
Ahead of the release, financial markets had been pricing in about a 30 per cent chance of a rate hike at the central bank's next meeting in August.
The odds were little changed after the release.
The RBA has increased interest rates three times in 2026, but economists are split on whether the bank has any more in store as it balances its dual mandate of getting inflation under control and maintaining full employment.
Beneath the surface-level message of the inflation report, the result was not comforting for the RBA, Global X senior investment strategist Marc Jocum said.
Dairy prices rose 5.2 per cent in the 12 months to May, while there was sharp growth in prices for beef and veal (13.3 per cent) and lamb and goat (14.8 per cent) because of strong overseas demand for Australian red meat.
Strong growth in food prices suggested underlying price pressures remained sticky in parts of the economy most visible to households, Mr Jocum said.
"It's a bit like getting a discount at the petrol pump while your shopping trolley keeps getting more expensive," he said.
But ANZ Bank economists Madeline Dunk and Adam Boyton said the report suggested the trimmed mean was tracking to 3.7 per cent for the June quarter, which would be a touch lower than the RBA's forecast of 3.8 per cent.
"When considered alongside the recent slowing in activity, (it) supports our view that the cash rate has peaked," the duo said.
Shadow treasurer Tim Wilson said Australia had a fundamental inflation problem caused by high government spending.
Crucial labour market figures are due to be released on Thursday.
9°C