Australia business conditions soften in May, cost pressures pick up

SYDNEY (Reuters) - Australian business conditions eased further in May to below their long-run average as growth in sales and profits slowed, a survey showed on Tuesday, while cost pressures showed signs of re-accelerating.

The survey from the National Australia Bank (NAB) revealed its index of business conditions fell 1 point to +6, just below its long-run average. That was driven by declines in sales and profits indices, although the employment index rose after a tumble the month before.

Its business confidence index fell 5 points to -3.

"Overall, the message here is a mixed one for the RBA," said Alan Oster, NAB 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 a fourth straight meeting last month but it has yet to rule anything in or out on policy. It said that it was vigilant on any upside inflation risks.

Markets are seeing interest rates staying at the current level for longer, with the first rate cut not fully priced in before July next year.

The NAB survey showed cost pressures have re-accelerated in May.

Quarterly growth in retail prices jumped to 1.6% from 1.0% before, while increases in labour costs and purchasing costs also picked up to 2.3% and 1.9%, from 1.5% and 1.3% previously.

"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.

(Reporting by Stella Qiu; Editing by Sam Holmes)