CPI falls to 4.2% in April, but core inflation remains high

With the consumer price index (CPI) rising from 3.7 per cent in February to 4.6 per cent in March, today’s announcement of 4.2 per cent represents a minor but welcome cooling trend.

However, the trimmed mean annual inflation increased from 3.3 per cent in the 12 months to March 2026 to 3.4 per cent in the 12 months to April highlights the continued cost of living impact.

Economist sentiment is likely to be varied.

BDO chief economist, Anders Magnusson, said: “Headline inflation was always going to moderate a little, but remain elevated in April while energy prices stayed high, but the more important signal is that trimmed mean inflation has started to rise.”

“That matters because trimmed mean inflation is the clearer measure of underlying price pressure that erodes living standards.”

“In March, higher fuel prices lifted headline inflation sharply, but had not yet flowed through to broader prices. Today’s data suggests that flow-through has begun”.

According to head of market insights at Convera, Steven Dooley, the rate “reinforces the picture that inflation in Australia is not cooling at the pace policymakers or households would like”.

He added: “Much of this inflation is driven by parts of the economy, like rents and wages, that respond slowly to interest rate increases. In other words, the bulk of the inflation problem is now in the categories that the Reserve Bank’s tools work on least effectively.

“This is impacting growth as well, and we are seeing it globally.”

In its May 2026 Statement on Monetary Policy, the RBA predicted a headline inflation peak of 4.8 per cent by the June quarter of 2026.

Following increases in February, March and May 2026, bringing the current cash rate to 4.35 per cent, the RBA is expected to keep interest rates steady and monitor just how much steam the economy is likely to lose as it looks to bring CPI inflation within its target of between two and three per cent.

Magnusson agreed that today’s CPI data is unlikely to force an immediate response.

“This will be uncomfortable for the RBA and limits its scope to ‘look through’ the energy shock as a temporary disruption that will just roll by.”

“The Board has to weigh a real risk that inflation becomes entrenched against equally real evidence that households and businesses are already under significant strain,” Dooley said.

“Consumer confidence is sitting near its lowest levels, and the three rate increases so far this year have added around $272 a month to repayments on a $600,000 mortgage. This effectively cancels out the relief that last year’s rate cuts had provided.”

“Whichever way the RBA moves at its next meeting, it will be a finely judged call rather than an obvious one.”

Partner at Deloitte Access Economics, Stephen Smith, said an August rate hike remains on the table.

“The data suggests the effects of the conflict-driven global energy shock are starting to flow through the Australian economy, adding to price pressures and increasing the risk of another rate hike later this year,” Smith said.

“Although headline inflation eased to 4.2 per cent over the year, that result partly reflects the Federal Government’s temporary fuel excise cut, which expires in little over a month.”

However, he acknowledged that April’s employment data showed “a clear softening in the labour market, with unemployment rising and employment falling”.

As such, Deloitte anticipates the RBA to hold rates in June, with a 25 basis point increase likely in August.

Dooley predicted the data would provide some near-term support for the Australian dollar, but said the country is moving in the opposite direction to most major economies, which is likely to “make Australian assets relatively more attractive to global investors, but it also has practical consequences for any business with imported costs or offshore revenue”.

This is likely to impact SMEs, he added.

“Input costs across fuel, freight, commercial rents, and insurance are still climbing faster than most businesses can pass through to customers, while consumer demand is softening at the same time.”

“For SMBs serving discretionary categories in retail, hospitality, and personal services, the working assumption should be that customer caution gets worse before it gets better.”

“The implications run further for larger firms. Audit teams should expect closer scrutiny of going-concern positions in interest-rate sensitive sectors such as construction and commercial property”.

In the same vein, APAC managing director at Employment Hero, James Keene, said the figures “reinforce the considerably difficult operating environment that we are currently in, which is continuing to have a flow-on effect to households and businesses alike”.

He also referenced Employment Hero’s most recent Jobs Report data, which, as recently covered in Accountants Daily's sister brand, HR Leader, saw wages rise 1.6 per cent MOM in April, the strongest monthly increase in more than six months, as well as a 4.8 per cent annual wage growth.

“While this is ultimately a positive sign for workers and household incomes, small businesses are now being squeezed from both sides, with both higher labour costs and sustained borrowing pressures at the same time.”

Keene added: “Small businesses are now being asked to absorb rising costs without the relief of lower financing costs or a meaningful easing in demand. That’s putting real pressure on cash flow, margins, and hiring across the sector.”

“For the sake of small businesses, we hope that the Reserve Bank takes this into account in next month’s decision, especially if they are considering a fourth rate rise.”

With an annual CPI inflation rate of 2.4 per cent in April 2025, the almost doubling of today’s CPI rate shows in plain terms the real impact on Australian businesses and homes.

“How well businesses adapt to that gap will define the second half of 2026,” Dooley said.