An extra 40,300 jobs were added to the economy in May, driving down the unemployment rate to 4.4 per cent, the Australian Bureau of Statistics reported on Thursday.
The fall in the unemployment rate was in line with economist expectations.
But the jump in employment exceeded consensus forecasts for around 25,000 new jobs to be added to the economy.
The labour force survey is notoriously volatile and the drop in the unemployment rate comes after it jumped 0.2 percentage points to 4.5 per cent in the month prior.
The unwind was driven by a reduction in the backlog of people who were waiting to start a job, ABS head of labour statistics Sean Crick said.
While the result suggests the labour market is still relatively resilient, it doesn't necessarily suggest it is tightening further.
But combined with underlying inflation rising stronger than expected on Wednesday, it adds to the case for another rate rise, VanEck head of investments and capital markets Russel Chesler said.
Meanwhile, household spending bounced back to rise 1.3 per cent in May, after a fall of 1.1 per cent in April, largely driven by a normalisation in transport spending after a spike in air fare refunds in April due to the Middle East conflict.
"This is not the clean slowing signal markets were hoping for," Mr Chesler said.
"The next inflation print will be critical. If employment remains resilient and consumers continue spending despite weaker growth and lower savings, the RBA may have little choice but to tighten again."
After three interest rate hikes so far in 2026, unemployment is expected to rise, but only gradually.
In its most recent set of forecasts, the Reserve Bank predicted the unemployment rate to average 4.2 per cent in the June quarter.
Part-time employment drove the growth in jobs, up 35,000 compared to 5000 additional full-time jobs.
The participation rate held steady at a relatively high 66.7 per cent.
Treasurer Jim Chalmers said the figures were a welcome reminder of the strength of Australia's labour market and the resilience of its economy in the face of global uncertainty.
Consumer price figures released on Wednesday showed trimmed mean inflation rose 3.6 per cent in the 12 months to May, even as a sharp fall in fuel prices caused headline inflation to drop to four per cent.
Fuel prices were still higher than before the onset of the Middle East conflict and businesses were passing on higher transport and material costs, Challenger chief economist Jonathan Kearns said.
But consumers remained resilient.
Spending rose strongly across discretionary categories. Hotels, cafes and restaurants expenditure was up 1.9 per cent while clothing and footwear was up 2.7 per cent.
"The rise in spending at hotels, cafes and restaurants was driven primarily by catering services, including restaurant meals, takeaway and dining out," said Tom Lay, ABS head of business statistics.
"Demand was also likely supported by sporting and cultural events across Australia, alongside higher catering and hospitality prices."
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