By Jacob Shteyman in Canberra

Interest rate relief could be around the corner after underlying inflation came in below expectations, prompting another big bank to bring forward its rate cut prediction.

The trimmed mean climbed 0.5 per cent in the December quarter, undershooting expectations of a 0.6 per cent rise and opening the door for the Reserve Bank of Australia to cut the cash rate at its February meeting.

Also known as underlying inflation, the trimmed mean is the central bank’s preferred measure of inflation because it shows a less volatile reading of price growth.

The annual rate fell to 3.2 per cent, its lowest level in three years, the Australian Bureau of Statistics reported on Wednesday.

The RBA had predicted the trimmed mean to rise 0.7 per cent for the quarter in its November forecast, though falling housing costs had since lowered inflation expectations substantially.

Given the surprise drop, Westpac brought forward its prediction for the first rate cut from May to February, joining CBA and ANZ.

The other big four bank holdout, NAB, was reviewing its call for May, while Citi and UBS also brought their forecasts forward to February.

“Inflation is not a barrier to a cut in February and the meeting is live,” said NAB senior markets economist Taylor Nugent.

The headline figure rose 0.2 per cent for the quarter, causing the annual consumer price index to fall from 2.8 per cent to 2.4 per cent.

With headline inflation below the mid-range of the RBA’s 2-3 per cent target band, Treasurer Jim Chalmers had reason to be optimistic that a pre-election cut was in sight.

“On every measure, we’ve made substantial and sustained progress in the fight against inflation,” he said.

“The soft landing we have been planning and preparing for is looking more and more likely.

“The biggest risk to the progress we have made together would be a coalition government that would come after Medicare again, push wages down again, and push electricity prices up.”

A 0.7 per cent fall in housing costs, the largest single component of inflation, dragged on the index, while travel and tobacco price rises drove the figure higher.

Government energy rebates also helped bring down headline inflation, ABS head of prices statistics Michelle Marquardt said.

“Electricity prices fell by 9.9 per cent in the December 2024 quarter, following a fall of 17.3 per cent in the September 2024 quarter,” she said.

“Without the rebates, electricity prices would have risen 0.2 per cent this quarter.”

Services inflation, which has particularly vexed the RBA, fell from 4.6 per cent to 4.3 per cent.

The rates market was pricing an 80 per cent chance of a cut in February, up from less than two-thirds ahead of the inflation print.

“More importantly, the rates market is pricing 85 basis points of rate cuts for 2025, which would see the cash rate end the year at 3.5 per cent, bringing relief to the Australian government during an election year, the RBA and mortgage holders,” IG markets analyst Tony Sycamore said.

That’s slightly more than the 75 basis points of cuts predicted by Deloitte Access Economics in a report released ahead of the inflation data.

Even if that comes to pass, Australians’ living standards are unlikely to return to pre-pandemic levels until 2030, Deloitte said.

Shadow treasurer Angus Taylor said the pain Australians were feeling was not going away, with prices remaining high even as inflation moderated.

“This treasurer is congratulating himself for the biggest collapse in Australian standard of living in our history,” he said.

“Only this treasurer could see that as a victory.”

Dr Chalmers said the government would announce more of its productivity agenda ahead of the election.

“One of the things we have tried to be very disciplined about is at the same time as we manage these near-term pressures on people, that we don’t drop the ball when it comes to the longer-term agenda,” he said.