The annual rate of headline inflation fell to 2.7 per cent in August, down from 3.5 per cent in July.

That huge slowdown in the pace of headline inflation was expected, but economists say it needs to be interpreted cautiously.

They say it partly reflects the recent introduction of Commonwealth and state government electricity rebates which have helped to drive down measured inflation in a technical way.

An important measure of underlying inflation — called “trimmed mean” inflation — only fell to 3.4 per cent in August, down from 3.8 per cent in July, according to the Bureau of Statistics’s latest monthly consumer price inflation (CPI) indicator.

This week, Reserve Bank governor Michele Bullock warned that such a divergence in those different measures of inflation would start to happen.

She said the RBA Board would therefore be focusing more intensely on the “trimmed mean” measure to guide its interest rate decisions.

“One thing we’re expecting with tomorrow’s monthly CPI indicator is that we’ll expect to see the cost of living relief come into play,” she warned on Tuesday.

“That’s going to lower electricity prices. Fuel prices have also come down in recent months.

“But it’s not really reflective of the underlying inflation pulse, which is what [we are] observing with services, really, which is the crux of the matter.

“And … really what we think that reflects is that demand is still a bit above supply, that that gap is still there, and that’s what the inflation pressure is reflective of,” she said.

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