Underlying inflation drops 0.4 points to 3.5 per cent, according to Australian Bureau of Statistics data

Headline inflation has dropped to its lowest level since 2021 but economists expect interest rates will stay on hold next week.

Consumer price rises slowed to 2.8 per cent as fuel fell and power bill credits helped temporarily ease pressure for Australians.

Australian Bureau of Statistics head of price statistics Michelle Marquardt said that was the “lowest annual inflation rate since the March 2021 quarter”.

The Reserve Bank’s preferred measure was also lower.

Trimmed mean inflation — which strips out volatile items including power bills — fell to 3.5 per cent. That’s down from 3.9 per cent in the year to June, according to the ABS on Wednesday morning.

It was in line with the consensus of economists reported by Bloomberg.

The RBA wants to be confident the metric is on track to stay within its target band of 2 to 3 per cent before moving to cut interest rates.

ANZ and Westpac predicted the RBA will hold until February.

“We do not think the decline in trimmed mean inflation will be enough to convince the RBA it should begin the easing cycle this year, particularly as there does not appear to be an urgent need to support the labour market, given its resilience over recent months,” ANZ senior economist Catherine Birch said.

RSM Australia Economist Devika Shivadekar said the latest numbers would be unlikely to shift rates at the meeting next week.

“Although today’s figures are a step in the right direction, concerns surrounding the persistent tightness in the labour market give the RBA every reason to maintain the status quo at 4.35 per cent next month,” Ms Shivadekar said.

VanEck portfolio manager Cameron McCormack also expected rates to stay on hold.

“Despite today’s announcement indicating inflation has fallen within the target range at 2.8 per cent, the RBA has specified on numerous occasions that it will not be persuaded by temporary measures that artificially lower the headline inflation figure,” Mr McCormack said.

“In this case, the government’s energy rebates. The preferred inflation measure, the trimmed mean, remains stubbornly high at 3.5 per cent.”

It comes one week after the International Monetary Fund projected Australia’s inflation would be close to the highest in the developed world next year.

Governor Michele Bullock warned in August that borrowers should not expect rate relief in the near future.

But the central bank showed signs of a pivot the following month, toning down the comments and declaring it was open to moving either way.

Overnight, markets expected just a 10 per cent chance of a rate cut at the RBA’s meeting next week.

A cut was not fully priced in until the June quarter of 2025.