Westpac’s retention of its August hike call, grounded in a trimmed mean trajectory pointing to 3.8% by end of Q2, puts it at the more hawkish end of the bank forecaster spectrum following Wednesday’s data. The distinction the bank draws between pass-through that can unwind, as postal costs demonstrated in May, and pass-through that is likely to prove sticky, particularly across services, is the most policy-relevant element of the analysis. A hairdressing price increase that reflects broader operating cost expectations rather than a direct fuel surcharge is structurally harder for the RBA to dismiss as transitory. Housing inflation running at 20% of the CPI basket and accelerating, with new dwelling costs posting their strongest monthly gain since December 2022, adds a persistence layer that sits independently of the energy shock narrative. The six-month annualised trimmed mean lifting from 3.2% to 3.5% is the momentum signal the RBA will be most focused on: it suggests the underlying inflation pulse is building rather than plateauing even as headline is flattered by fuel and travel base effects. Wage cost pressures flagged for the second half, particularly across market services, extend the risk horizon well beyond the August meeting.

—

Westpac retained its August RBA hike call after May CPI data showed trimmed mean tracking to 3.8% in Q2 as Middle East second-round effects broaden across consumer prices.

Summary:

• Westpac said May’s headline CPI miss, driven by falls in travel, clothing and recreation, was largely seasonal and did not alter its view that underlying inflation pressures are building, with the bank retaining its call for an RBA rate hike at the August meeting
• Trimmed mean inflation of 0.4% month-on-month and 3.6% year-on-year came in line with Westpac’s own forecast but above market expectations, with the six-month annualised pace lifting from 3.2% to 3.5%, and the bank expects Q2 trimmed mean to reach 3.8% annually
• Westpac identified the May data as providing a stronger signal that second-order effects from the Middle East supply shock are broadening across consumer prices, with higher fuel, freight, plastics and chemical costs feeding through to a wider range of categories beyond energy-linked items
• Housing was the key upside surprise, rising 0.5% month-on-month against a 0.3% forecast, with new dwelling costs posting their strongest monthly gain since December 2022 at 0.9% and rents also surprising to the upside; housing accounts for around 20% of the CPI basket and is a persistent driver of trimmed mean inflation, per Westpac
• The bank flagged the key policy question as whether cost pass-through proves reversible or sticky, noting that while postal costs fell as fuel surcharges eased, services price increases such as hairdressing may reflect broader operating cost expectations rather than direct energy pass-through, making them harder to unwind
• Westpac warned that wage cost pressures could add further inflation impetus in the second half of 2026, particularly across market services, while policy supports including the fuel excise cut are expected to unwind, keeping upside risks to inflation front of mind for the RBA

Westpac has retained its call for a Reserve Bank of Australia interest rate hike at the August meeting, arguing that May’s softer headline consumer price index reading masks a broadening and increasingly persistent underlying inflation dynamic that the central bank will find difficult to look through.

Australia’s headline CPI fell 0.7% in May and slowed to 4.0% on an annual basis, undershooting both Westpac’s own forecast of 4.4% and the market consensus of 4.3%. The bank characterised the miss as largely explicable by seasonal patterns and a concentration of weakness in a handful of volatile categories. Recreation and culture was the largest drag, driven by sharper-than-expected falls in domestic and international travel, while clothing and footwear and household textiles also came in weaker than forecast. Westpac noted that May is typically a seasonally softer month for consumer prices, and that in seasonally adjusted terms the monthly decline was more modest.

The more significant signal, in Westpac’s assessment, came from the core measures. Trimmed mean inflation rose 0.4% in the month and 3.6% on the year, in line with the bank’s own forecast but above the market’s 3.5% expectation. The six-month annualised pace of trimmed mean inflation lifted from 3.2% to 3.5%, a momentum indicator the RBA monitors closely and one that points in the wrong direction. Westpac expects Q2 trimmed mean to reach 3.8% annually, consistent with its view that further tightening is needed.

The bank’s central analytical argument is that second-order effects from the Middle East supply shock are becoming more visible and more broadly distributed across consumer prices. Higher fuel, freight, plastics and chemical costs are feeding through to categories well beyond energy-linked items, consistent with firms passing on at least part of their increased input cost burden. Some of that pass-through can reverse: Westpac noted that postal costs fell in May as fuel surcharges were wound back, demonstrating the mechanism can work in both directions. But the bank warned that pass-through in other areas, particularly across services, may prove stickier. Price increases in areas such as hairdressing, it argued, may reflect firms adjusting for a broader expectation of higher operating costs rather than responding to a specific and temporary input cost increase, a distinction that matters considerably for how long elevated core inflation persists.

Housing adds a structural layer to the inflation outlook that sits independently of the energy shock. The component rose 0.5% in May against a 0.3% forecast, with new dwelling costs posting their strongest monthly gain since December 2022. Rents also surprised to the upside. With housing accounting for around 20% of the CPI basket and representing one of the most persistent contributors to trimmed mean inflation, Westpac flagged it as a sustained upside risk rather than a transitory one.

Looking further out, the bank identified wage costs as a potential additional pressure point in the second half of 2026, particularly across market services, while noting that policy supports including the fuel excise reduction are expected to unwind in coming months. That combination keeps the RBA’s job unfinished and, in Westpac’s view, points clearly to August as the moment for a fourth hike this year.