Housing costs and petrol both rise

The TD Securities/Melbourne Institute inflation gauge rose 0.1 per cent in May, giving an annualised rate of inflation of 2.6 per cent.

The rise in the inflation index over May followed a 0.1 per cent rise in April. It was the lowest annual increase in the gauge since March 2006.

The trimmed mean of the TD-MI Inflation Gauge, a measure of underlying inflation, rose 0.1 per cent in May, following a 0.1 per cent rise in April.

The trimmed mean rose by 2.6 per cent over the year to May 2007.

Petrol, housing costs rise

Contributing most to the overall increase in the inflation gauge in May were rises in the cost of fuel, groceries and housing.

The price of petrol rose by 2.7 per cent during May.

Price decreases in audio, visual and computing, bread and cereal products, and holiday travel and accommodation partially offset these increases.

TD Securities senior strategist Joshua Williamson said that while the rate of inflation had eased, the underlying inflation risk remained on the upside.

"The deceleration in annual inflation, as measured by the inflation gauge, fits with the recent pattern of the official inflation data, although there is some base effect with annual inflation moderating to its slowest pace in a year," he said.

"However, inflation is not being held lower by softer domestic demand, but rather the ongoing ability of Asia to export cheaper finished goods and further easing in the price of some services, for example, holiday travel and accommodation.

"These trends have been enhanced by the recent strength of the Australian dollar.

"However, the risks to underlying inflation remain to the upside," he said.

"Domestic demand is robust, global policy rates outside of the US are rising, and Australian households and governments are spending freely in an environment of constrained domestic product and labour markets."

Source: AAP