Australian quarterly CPI data published today showed a fall in both headline and underlying measures of inflation in the three months to December. Monthly CPI data also released today also showed a third consecutive decline in headline inflation in December. This evidence of moderating price pressures will likely convince officials at the Reserve Bank of Australia to leave policy rates on hold at their meeting next week and has boosted market expectations for policy to be eased later in the year.

The consumer price index rose 0.6 percent on the quarter in the three months to December after increasing 1.2 percent in the three months to September, below the consensus forecast for an increase of 0.8 percent. Headline CPI inflation fell from 5.4 percent to 4.1 percent, below the consensus forecast of 4.3 percent. Headline inflation has been above the RBA's target range of 2.0 percent to 3.0 percent since 2021 but has now fallen for four consecutive quarters.

The fall in headline CPI inflation in the three months to December was largely driven by a smaller increase in electricity prices, largely reflecting the impact of government rebates. Government rent assistance provided to low-income households also restrained the increase in housing costs over the quarter. Nevertheless, even excluding the impact of these government measures, prices rose on the year at a slower pace for most categories of spending, including food.

Measures of core inflation, which exclude the impact of volatile price changes, also moderated in the three months to December. The trimmed mean CPI advanced 0.8 percent on the quarter after rising 1.2 percent previously, with the year-over-year increase falling from 5.2 percent to 4.2 percent. The weighted median CPI inflation measure rose 0.9 percent on the quarter after increasing 1.3 percent previously, with the year-on-year increase falling from 5.2 percent to 4.4 percent.

Fourth-quarter consumer prices are expected to rise 0.8 percent on the quarter and 4.3 percent on the year. These would mark slowing from third-quarter rates of 1.2 and 5.4 percent.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by households for a fixed basket of goods and services. In Australia, the CPI measures the changes in the price of a fixed basket of goods and services, acquired by household consumers who are residents in the eight State/Territory capital cities. (Darwin, Perth, Sydney, Melbourne, Hobart, Brisbane, Canberra and Adelaide).

Data are released quarterly and, since 2022, monthly. Quarterly inflation data measure the year-over-year change in the index relative to the same quarter twelve months previously. Monthly inflation data measure the year-over-year change in the index relative to the same month twelve months previously.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as Australia, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments. Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Reserve Bank of Australia generally follows the annual change in the consumer price index. It has an inflation target of 2 percent to 3 percent. The RBA also has two preferred core or analytical measures - the weighted and trimmed means. The trimmed mean is a method of averaging that removes a small percentage of the largest and smallest values before calculating the mean. After removing the specified observations, the trimmed mean is found using an arithmetic averaging formula. The weighted mean excludes certain items from the CPI basket (the exclusion approach). Typically, the excluded items are those that are volatile and/or display pronounced seasonal patterns, and those that are subject to administrative price setting.