In May, business conditions in Australia softened while cost pressures increased.

SYDNEY (Reuters) – Australian business conditions further weakened in May, falling below their long-run average as sales and profit growth slowed, according to a survey released on Tuesday. Meanwhile, cost pressures showed signs of re-accelerating.

The National Australia Bank (NAB) survey revealed that its business conditions index dropped by 1 point to +6, slightly below its long-run average. This decline was driven by decreases in the sales and profits indices, although the employment index rose after a decline the previous month. The business confidence index fell by 5 points to -3.

“Overall, the message here is a mixed one for the RBA,” said Alan Oster, NAB’s chief economist. “There are warning signs on the outlook for growth but at the same time reasons to be very wary about the inflation outlook, and we expect the RBA to keep rates on hold for some time yet as they navigate through these contrasting risks.”

The Reserve Bank of Australia (RBA) left interest rates unchanged at 4.35% for the fourth consecutive meeting last month but has not ruled out any policy changes. The RBA stated that it remains vigilant regarding any upside inflation risks.

Markets anticipate that interest rates will remain at the current level for an extended period, with the first rate cut not fully expected until July next year.

The NAB survey indicated that cost pressures re-accelerated in May. Quarterly growth in retail prices jumped to 1.6% from 1.0% previously, while increases in labor costs and purchasing costs also rose to 2.3% and 1.9%, up from 1.5% and 1.3%, respectively.

“We have been wary for some time that the path of inflation from here is likely to be gradual and uneven, and the survey results really reinforce this message,” said Oster.

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