The local economy faces its sternest test of the quarter this week, and it arrives in two parts. The May monthly CPI indicator is released by the ABS today at 11:30am AEST. The May labour force figures follow tomorrow. Neither print is dramatic on its own. Read together, they will tell us whether the Reserve Bank’s tightening cycle is genuinely over, or whether the market is mistaking a pause for a peak.
We think the distinction matters more than the consensus allows.
The headline is cooling, the core is not
Inflation has been the better-behaved of the two readings. The headline rate eased to 4.2% in the year to April, down from 4.6% in March, and recent monthly prints have tended to land at or below forecast. On the surface, that is the disinflation story the market wants to hear.
Look one layer down and the comfort thins. Trimmed mean inflation, the RBA’s preferred gauge of underlying price pressure, ticked up to 3.4% in April from 3.3%. Housing and transport remain the dominant contributors, both running above 6%. Consensus for today’s May reading is a re-acceleration in the headline rate to roughly 4.4%, even as the month-on-month change softens.
So the question is not whether inflation is high. It plainly is, still sitting above 4% and well outside the RBA’s 2 to 3% target band. The question is whether the recent easing in the headline number reflects durable progress or simply a favourable mix in a handful of volatile components. A print that beats expectations to the downside today would strengthen the case that the worst is behind us. A print in line with, or above, the 4.4% consensus would confirm that underlying inflation is proving stubborn precisely where it is hardest to shift.
Unemployment is the variable that has actually moved
If inflation has been the story the market tells itself, unemployment is the one it has been reluctant to confront. The rate climbed to 4.5% in April, having tracked up from the low 4s over recent months. Tomorrow’s May figure will show whether that is a trend or a wobble.
A rising unemployment rate is, in isolation, a negative. But it cuts in two directions at once. A softer labour market eases wage pressure and gives the RBA cover to stop tightening, which parts of the market will read as good news. We are more cautious. The labour market has been the single strongest pillar holding the domestic economy together through this cycle. If the move from the low 4s toward 4.5% reflects a structural loosening rather than a temporary cooling, then the economy is losing its last point of resilience at the same time inflation is refusing to fully retreat.
That is a more uncomfortable combination than a simple “rate cuts are coming” narrative suggests.
The RBA is not where most investors think it is
It is worth being precise about the policy backdrop, because it is frequently misremembered. The RBA has raised the cash rate three times in 2026, in February, March and May. It held at 4.35% on 16 June, and it explicitly kept the door open to further increases if required.
This is not a central bank easing into a soft landing. It is a central bank that has been tightening into sticky inflation and is now pausing to assess the lag effects of its own moves, with a clear bias to hike again if prices do not behave. Markets that are positioning for the top of the cycle, or worse, for cuts, are front-running a pivot the RBA has pointedly declined to signal.
This week’s two prints are the most important inputs the Board will weigh before its next decision. Soft inflation plus rising unemployment is the only combination that genuinely ends the tightening debate. Anything else keeps the bias intact.
The index is masking what is happening underneath
The S&P/ASX 200 closed around 8,816 to start the week, barely changed, which is its own kind of message. The headline index has been resilient. The companies inside it have not been uniformly so.
This week’s index rebalance made the point bluntly. Temple & Webster was removed after falling roughly 75% over the past year. It is not an isolated casualty. Discretionary retailers as a group are down 70 to 80% from their highs, with Accent Group now fielding takeover interest from offshore as its valuation has compressed to the point of being a target. When overseas buyers start circling listed Australian retailers, it tells you the domestic consumer is under real strain, whatever the index level implies.
For investors, the lesson is the one we return to often. A flat index can conceal a wide dispersion of outcomes underneath it. The work is in the selection, not the benchmark.
The AI debate, and the safer way to own it
The other conversation dominating markets is the growing weight behind the “AI bubble” thesis. There are credible arguments on both sides, and we are not in the business of calling tops on a theme this large. What we will say is that there is a meaningful difference between owning the speculative front end of artificial intelligence and owning the physical infrastructure it depends on.
The most disciplined way to take exposure, in our view, is through the picks-and-shovels layer: the data centres. And our preference is for the operators and landlords here in Australia rather than the offshore hyperscaler names that carry the richest valuations and the most narrative risk. Domestic capacity, sovereign data requirements and the build-out of local compute are structural tailwinds that exist whether or not the most aggressive AI earnings forecasts are ever met.
NextDC, Goodman Group and even Macquarie Telecom sit in that conversation. We mention them as illustrations of the theme, not as recommendations. The point is the framing: own the infrastructure that gets used in either scenario, rather than betting the outcome of a debate that no one can yet resolve.
What it means for portfolios
Pulling the threads together, our read is a measured one. The tightening cycle may well be near its end, but “near the end” is not the same as “over”, and the market has a habit of collapsing that distinction. Inflation above 4% with a softening labour market is not a strong backdrop. It is a late-cycle one, and late cycle rewards selectivity, balance-sheet quality and genuine diversification across asset classes that do not all depend on the same domestic growth story.
For the investors we work with, that argues for resilience over reach: assets backed by real cash flows, exposure to structural themes that survive a slowdown, and a portfolio built to hold its shape if this week’s data tilts the wrong way. Today and tomorrow we will get two of the cleanest reads on the economy we have had all quarter. We will be watching both closely, and positioning accordingly.
If you would like to discuss how your portfolio is placed for this stage of the cycle, book a strategy call with us.
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Joshua Barker joined ausbiz to discuss the ASX open and what global markets are signalling for Australian investors.
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This article is intended for general informational purposes only and does not constitute financial product advice, legal advice, or tax advice. The information provided is based on general principles under the Corporations Act 2001 (Cth) and may not apply to your individual circumstances. Always consult a licensed financial adviser and a qualified accountant before making investment decisions. Past performance is not a reliable indicator of future performance.