Core inflation has fallen to 3.2 per cent annually, opening the door for the Reserve Bank of Australia to cut interest rates at its next meeting.

The trimmed mean – the central bank’s preferred measure of inflation – grew at 0.5 per cent in the December quarter, the Australian Bureau of Statistics reported on Wednesday, below consensus expectations.

Also known as underlying inflation, the trimmed mean removes items with the largest price changes at either end to show a less volatile reading of price growth.

The RBA had predicted the trimmed mean to rise 0.7 per cent for the quarter in its November forecast, although a surprise drop in housing costs had substantially lowered inflation expectations since.

The headline figure rose 0.2 per cent for the quarter, causing the annual consumer price index to fall to 2.4 per cent.

A 0.7 per cent fall in housing costs, the largest single component of inflation, drove the lower than expected increase.

“December quarter’s rise was the same as the 0.2 per cent increase in the September 2024 quarter,” ABS head of prices statistics Michelle Marquardt said.

“These rises were the lowest recorded since the June 2020 quarter when the CPI fell during the Covid-19 outbreak when childcare was free.”

“December quarter’s rise was the same as the 0.2% increase in the September 2024 quarter. These rises were the lowest recorded since the June 2020 quarter,” Michelle Marquardt, ABS head of prices statistics

For more, see https://t.co/p1xRSbqIX7 pic.twitter.com/nZmEk2gkrl

— Australian Bureau of Statistics (@ABSStats) January 29, 2025

Services inflation, which had particularly troubled the RBA, fell from 4.6 per cent to 4.3 per cent.

The rates market had priced in a 63 per cent chance of a cut at the February board meeting ahead of the inflation figures release. The chances jumped above 70 per cent in the minutes after Wednesday morning’s release of the data.

Betashares chief economist David Bassanese titled his note reacting to the latest data “Cut baby cut!”.

“There’s now a good chance trimmed mean ‘underlying’ inflation could fall back to with the RBA’s 2-3 per cent inflation target band by June, rather than the RBA’s current expectation of December,” he wrote.

“As a result – and despite still solid employment growth – there’s no question the economy deserves an interest rate cut to ease the restrictiveness of current policy settings.”

Treasurer Jim Chalmers hailed Wednesday’s figures.

“Headline inflation is now at an almost four-year low and now sits in the middle of the Reserve Bank’s target band, and underlying inflation is now at its lowest in three years,” he said.

“These are very welcome developments. We don’t pretend it is mission accomplished on inflation but we are making very substantial progress.”

He said the latest numbers had been driven by falls in construction costs, rates and insurance.

“That, I think, is quite an encouraging sign that inflation is moderating more quickly than anticipated, even as recently as the
forecasts that we released in December,” he said.

“These numbers are better than the market expected and they are lower than the forecast for inflation – and both of those developments are very welcome.”

Finance Minister Katy Gallagher said while the battle against inflation wasn’t over, there had been significant steps.

“We’ve been making sure that the decisions we take don’t work against the RBA and their response to get inflation down, so I think the statistics speak for themselves,” she told ABC radio ahead of the data release.

“We have seen very, very substantial progress in seeing inflation come down and that’s really important, because that obviously affects how [people] manage their household budgets.”

The RBA first meeting for 2025 is on February 18.

-with AAP