Monthly CPI data show headline inflation in Australia fell from 3.5 percent in July to 2.7 percent in August, below the consensus forecast of 2.9 percent. This is the third consecutive decline in headline inflation and takes the level to within the Reserve Bank of Australia's target range of two percent to three percent for the first time in nearly three years. This monthly indicator measures the year-over-year change in the CPI index compared with the same month twelve months earlier.

The fall in headline inflation in August was largely driven by energy costs, with automotive fuel prices falling 7.6 percent on the year after a previous increase of 4.0 percent and electricity prices falling 17.9 percent on the year after a previous decline of 5.1 percent. This fall in electricity prices was driven by government rebates. Were it not for these rebates, electricity prices would have risen by 0.1 percent in August. Other categories of spending also recorded smaller price increases, including food, clothing, communications and education.

Today's data show a moderation in underlying price pressures in August. The measure of inflation that excludes volatile items including fuel and holiday travel fell from 3.7 percent in July to 3.0 percent in August while the monthly trimmed mean measure fell from 3.8 percent to 3.4 percent.

At the RBA's previous meeting, held earlier in the week, officials highlighted uncertainties impacting the inflation outlook and again reiterated that returning inflation to target remains their highest priority. Officials also noted that they see little prospect of reducing policy rates over the rest of the year. Though August's update showing a moderation in underlying prices pressures will be welcomed by the RBA, officials have previously advised that they will discount the impact of the government rebates on headline inflation.

Consumer prices in August are expected to slow to a 2.9 percent year-over-year growth rate versus July's 3.5 percent rate which was down from June's 3.8 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.