INTEREST rate relief could be around the corner after underlying inflation came in below expectations.

Core inflation fell to 3.2 percent in the year to December, opening the door for the Reserve Bank of Australia to cut the cash rate at its next meeting.

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The trimmed mean, which is the central bank’s preferred measure of inflation, grew 0.5 per cent in the December quarter, the Australian Bureau of Statistics reported on Wednesday.

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

That undershot consensus expectations of a 0.6 percent rise.

The RBA had predicted the trimmed mean to rise 0.7 percent 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 percent for the quarter, causing the annual consumer price index to fall to 2.4 percent.

With underlying inflation at a three-year low and headline inflation below the mid-range of the RBA’s 2-3 percent target band, Treasurer Jim Chalmers had reason to be optimistic that mortgage relief was in sight.

“On every measure, we’ve made substantial and sustained progress in the fight against inflation,” he said.

“The soft landing we have been planning and preparing for is looking more and more likely.

“The worst of the inflation challenge is well and truly behind us.

“The biggest risk to the progress we have made together would be a coalition government that would come after Medicare again, push wages down again, and push electricity prices up.”

A 0.7 percent fall in housing costs, the largest single component of inflation, dragged on the index, while travel and tobacco price rises drove the figure higher.

Government cost-of-living relief helped bring down headline inflation in the form of energy rebates, ABS head of prices statistics Michelle Marquardt said.

“Electricity prices fell by 9.9 per cent in the December 2024 quarter, following a fall of 17.3 percent in the September 2024 quarter,” she said.

“Without the rebates, electricity prices would have risen 0.2 percent this quarter.”

Services inflation, which had been particularly troubling the RBA, fell from 4.6 percent to 4.3 percent.

The scene is now set for the RBA to cut rates at its next meeting in February, IG markets analyst Tony Sycamore said.

“After another decisive step lower inflation is within sight of the RBA’s 2-3 percent target range and well below the RBA’s 3.6 percent forecast in the November statement of monetary policy,” he said.

The rates market had been pricing in a 63 per cent chance of a cut in February ahead of the inflation figures release.

The market repriced the chance to more than three-quarters following the announcement.

“More importantly, the rates market is pricing 85 basis points of rate cuts for 2025, which would see the RBA’s official cash rate end the year at 3.5 percent,” Mr Sycamore said.

That’s slightly more than the 75 basis points of cuts predicted by Deloitte Access Economics in a report released ahead of the inflation data.

Even if that comes to pass, Australians have suffered a sharp fall in living standards which aren’t likely to return to pre-pandemic levels until 2030, it said.

By Jacob SHTEYMAN, AAP