The monthly Consumer Price Index indicator has dipped to 3.5% in the 12 months to July, which is a noteworthy fall on the June monthly CPI figure of 3.8%.
The market had forecast the drop, with the consensus view at 3.4%, taking into account federal and state government energy rebates.
The official data shows electricity costs dropped 6.4% in July.
The biggest price rises were recorded in housing (+4%), food and non-alcoholic beverages (+3.8%), alcohol and tobacco (+7.2%), and transport (+3.4%) in the 12 months to July.
The trimmed mean inflation figure has come in at an annualised 3.8%, down on the previous trimmed figure of 4.1% for June.
Last quarter's lower-than-expected trimmed mean figure, the Reserve Bank of Australia's preferred measure of underlying inflation, was 3.9%, down from 4.0% for the March quarter.
The lower trimmed number effectively fuelled market speculation of a cash rate cut by the end of 2024.
Why is the market watching July CPI?
Wednesday's data sees the first CPI figure since the stage three tax cuts took effect from 1 July, as well as federal and state government household energy rebates.
Electricity is a key component in measuring CPI inflation, rising 6% in the 12 months to June.
The hit would have been 14.6% without the federal government's Energy Bill Relief Fund rebates paid out from July 2023.
In this year's federal budget in May, the government announced new $300 across-the-board energy relief payments to households.
Not to be outdone, the Queensland government trumped it with a $1,000 energy rebate, which also took effect in July, while the Western Australian government also topped up the federal payment with $400 in energy relief.
Both states have upcoming elections - Queensland in October and Western Australia in March next year.
Judo Bank chief economist Warren Hogan said it sets the stage for what he calls "the politicisation of inflation".
Energy relief bid to 'artificially' lower inflation
Critics have slammed the federal government energy rebate as a blatant move to lower CPI inflation in a bid to precipitate a rate cut in the run-up to the federal election, also due next year.
Some have suggested the government is sabotaging the RBA's efforts to bring inflation to its 2-3% target by pumping more cash into the economy for its own political benefit.
Mr Hogan told the Savings Tip Jar podcast he's ready for the "fun and games" that will likely follow the July inflation data.
"These massive government subsidies which the opposition and some economists are saying is the government policy to reduce inflation is absolute and utter rubbish," Mr Hogan said.
"It's the government policy to reduce cost of living because it's actually giving a subsidy to households to help them with their electricity prices."
Mr Hogan said it doesn't do anything to inflation "other than measured inflation".
Too early to call
He noted he shared the RBA's view that underlying inflation, in this case the trimmed mean figure, gives the most accurate picture of where inflation is headed.
"The RBA has made it very clear in a whole range of statements, they're going to look through all that and look at what the underlying pulse of inflation is," he said.
"We'll get some insight into that [in the July data] and how these subsidies are affecting the data."
But Mr Hogan said commentators shouldn't lend too much weight to the monthly data and it would be the quarterly data, due in October, that would give the best indication.
Up until last month's CPI data, Mr Hogan remained among the small group of hawkish economists spruiking the need for further hikes to the cash rate to tame inflation.
But he is steadfast if inflation stays where it is, or starts to pick up next year, Australia is "in trouble".
"I hope it doesn't play out that way but the window to take out a bit more insurance and raise the [cash] rate up towards five [5%] is pretty much closed," he said.
Mr Hogan said he would now be looking to November to see what way inflation and the RBA goes.
Market pushing for interest rate cuts
Mr Hogan also took aim at the markets for pushing for a drop in the cash rate by the end of the year even after RBA governor Michele Bullock all but ruled it out.
Bond yields have fallen since the weaker-than-expected CPI for June, indicating global markets are still widely pricing in an interest rate cut by the end of 2024.
Mr Hogan noted the big banks are currently taking advantage of money market conditions to cut their fixed rate home loan offerings.
Since late July, NAB, Macquarie, Westpac, and CommBank have slashed their fixed rate mortgages with CBA also dropping some of its variable rates on Friday.
However rather than a view of the economy, he said these moves are to take advantage of the lower wholesale funding rates and re-enter the mortgage wars.
"That is CBA taking a view. There's a bit of confidence in the background," Mr Hogan said.
"But that's really the market competition view that says we want to get market share in mortgages from ANZ, or Westpac, or NAB."
CommBank remains the outlier among Australia's big four banks in forecasting a cut in the cash rate in November.
The other three have pushed their forecasts out to early to mid-2025.
Mr Hogan said the CommBank move to drop variable rates is a marker the "market backdrop has shifted" to greater confidence there won't be a rate hike.
However, he said he didn't necessarily agree with that view.
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