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Inflation benign, rate cut possible

Inflation remains comfortably within the official two to three per cent target band, removing a key barrier to an interest rate cut when the central bank holds its first board meeting of the year on February 5.

The Australian Bureau of Statistics said on Wednesday the consumer price index (CPI) rose by just 0.2 per cent in the December quarter, which was half what economists expected.

This was a sharp slowdown down from the 1.4 per cent jump in the September quarter, and left the annual inflation rate at 2.2 per cent.

The bureau said the most significant price falls during the December quarter were a 5.7 per cent decline in vegetables, a 4.3 per cent drop in audio, visual and computing equipment and a 3.5 per cent easing in pharmaceutical products.

These were offset by a 6.2 per cent increase in domestic holiday travel and accommodation prices, a 2.6 per cent rise in petrol and a 0.8 per cent lift in rents.

Underlying measures of inflation - the trimmed mean and the weighted median - and crucial to the interest rate outlook, were also more subdued than economists had expected.

They grew by an average 0.55 per cent in the December quarter, for an annual rate of 2.3 per cent.