Monthly CPI data show headline inflation in Australia rose from 2.3 percent in November to 2.5 percent in December, matching the consensus forecast. Headline inflation has now been within the Reserve Bank of Australia's target range of two percent to three percent for five consecutive months after it had been above that range for nearly three years. This monthly indicator measures the year-over-year change in the CPI index compared with the same month twelve months earlier.

Higher headline inflation in January was driven by smaller declines in energy prices. Automotive fuel prices fell 1.4 percent on the year after a previous decline of 10.2 percent while electricity prices dropped 17.9 percent on the year after a previous decline of 21.5 percent. This fall in electricity prices was mainly driven by government rebates. Other categories of spending recorded weaker price changes with food prices recording a smaller increase and communication prices down slightly on the year after a previous increase.

The consensus looks for CPI up 2.5 percent on the year in December versus 2.3 percent in November. Forecasters cite accelerating price increases for fuel, clothing and holiday travel.

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.