The annual trimmed mean, a measure of core inflation closely watched by the Reserve Bank, edged up to 3.6 per cent in May from 3.4 per cent a month earlier, the Australian Bureau of Statistics reported on Wednesday.
The result was above the consensus estimate of forecasters, who had pencilled in a rise to 3.5 per cent.Â
Meanwhile, headline inflation fell to four per cent annually from 4.2 per cent in April, confounding economist expectations of a slight increase.
The fall in the headline figure was driven by an 11.9 per cent dip in fuel prices for the month.
Housing costs were the largest contributor to annual inflation, up 6.5 per cent.
They are closely watched by the central bank because they make up a large proportion of the consumer price basket and tend to be relatively sticky.
The figure reflected rising costs for electricity, new dwellings and rents, according to ABS head of price statistics Rachael McCririck.
"Electricity costs are 21.1 per cent higher than 12 months ago as commonwealth and state government rebates that reduced electricity costs for households are no longer in place," she said.
Ahead of the release, financial markets had been pricing in about a 30 per cent chance of a rate hike at the RBA's next meeting, in August.
The RBA has already increased interest rates three times in 2026 but economists are split on whether the bank has any more in store as it balances its dual mandate of getting inflation under control and maintaining full employment.
Crucial labour market figures are due to be released on Thursday.
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