By Jacob Shteyman

Australia’s headline inflation rate has fallen more sharply than expected, but a rise in the underlying measure will be cause for concern at the Reserve Bank.

A decline in petrol prices as a result of the government’s fuel excise cut caused the increase in the annual consumer price index to slip to 4.2 per cent in April, from 4.6 per cent the previous month, the Australian Bureau of Statistics reported on Wednesday.

Forecasters had been expecting the headline inflation rate to fall to 4.4 per cent.

However, the trimmed mean, which omits volatile items and gives a better sense of the underlying pulse of price increases, edged up to 3.4 per cent, in line with the consensus of forecasters.

While the slightly softer-than-expected reading won’t add to the case for more rate hikes, the RBA board will be wary not to take too much confidence from one month of data.

Disruptions from the closure of the Strait of Hormuz continue to impact global supply chains and the underlying impulse of price pressures – excluding the temporary easing in fuel prices – is still growing.

Fuel prices fell seven per cent in the space of one month after a spike of 32.8 per cent in March.

But fuel prices were still 23.5 per cent higher than in February, before the impact of the Middle East conflict, ABS head of prices statistics Sue-Ellen Luke said.

“The impact of higher oil prices has also been seen in products and services with high freight and logistics costs, such as parcel delivery and building materials,” she said.

“This is reflected in price increases of 12.4 per cent for postal services and 4.7 per cent for new dwelling construction compared to 12 months ago.”

Following a weaker-than-expected employment result for April, markets have scaled back bets for future interest rate rise.

Traders are still expecting at least one more 25-basis point increase by the end of 2026.

Oxford Economics Australia economist Harry McAuley said the first glimpses of the wider inflationary impacts of high oil prices were being seen.

Alongside the jump in the unemployment rate, Mr McAuley said his view was firm the rate-hike cycle was on hold, although that was contingent on tankers being able to exit the Strait of Hormuz sooner rather than later.

Construction work rose 3.4 per cent to $83.4 billion in the first three months of the year, the ABS also revealed on Wednesday, in a sign the economy was still holding up despite interest rate hikes and the early impacts of the Iran war.

BDO chief economist Anders Magnusson said the more important signal was that trimmed mean inflation had started to rise.

“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,” he said.

“The recent lift in unemployment suggests that higher interest rates may be starting to slow demand, but that is less meaningful if inflation remains high.”