Underlying pressures suggest second-round effects from the Middle East conflict are broadening despite the weakness in the headline inflation in May, Westpac Banking said in a report on Wednesday.

Australia's consumer price index rose 4% on year in May, down from the 4.2% rate posted in April, data from the Australian Bureau of Statistics showed. This was below Westpac's estimate of 4.4% and market expectations of 4.3%. The key drivers behind the softer May outcome were transport, clothing and footwear, as well as recreation and culture, balanced by a broad-based pick-up across electricity, rents, and new dwelling costs.

Trimmed mean annual inflation was 3.6% in the 12 months to May, up from 3.4% in the 12 months to April.

Recreation and culture was the key miss due to bigger-than expected falls in domestic and international travel, falling past 12% and 0.8% month over month, respectively. Westpac said. New dwelling costs rose 0.9% on a month basis, the strongest monthly increase since December 2022.

The May data reinforce the central bank's concern that inflation remains too high and that a period of slower growth will be needed to return inflation to target, Westpac said. Housing inflation also remains a key pressure point, accounting for around 20% of the CPI basket.