A general view of a shopping aisle at Woolworths supermarket in Melbourne, Monday, September 23, 2024. [Source: AAP Image/Con Chronis]

A massive drop in electricity prices has lowered monthly inflation back into the central bank’s target, as mortgage holders cling to hopes of a rate cut.

Inflation cooling to 2.7 per cent in the 12 months to August, down from 3.5 per cent in July, brought it to its lowest point in nearly three years, largely off the back of electricity subsidies.

Federal and state electricity helped bring power bills down 17.9 per cent, the largest annual fall on record.

Electricity bills would have jumped 16.6 per cent since June 2023 without the rebates, according to the Australian Bureau of Statistics.

While inflation is tracking in the right direction, it’s not all good news for mortgage holders, with the trimmed mean – a number that cuts out irregular or temporary prices changes – coming in at 3.4 per cent in August.

Although down from 3.8 per cent in July, it’s still above the Reserve Bank’s target band and the central bank pays more attention to this gauge of underlying inflation when making rates decisions.

The annual trimmed figure excluded the falls in fuel and electricity.

The volatility of the monthly figure made it less influential than the quarterly one, next due in October, RBA governor Michele Bullock said.

Alcohol and tobacco prices rose 6.6 per cent, food and beverages 3.4 per cent, and housing 2.6 per cent in the year to August, but transport fell by 1.1 per cent.

Fuel sank 7.6 per cent.

Interest rate hikes have sought to take the wind off the back of the economy and slow inflation but a rate cut isn’t expected until 2025 after the RBA held rates at 4.35 per cent on Tuesday.

National Australia Bank senior economist Tapas Strickland predicted the headline monthly figure won’t make any difference to the likelihood of the central bank cutting rates

He expects the first cut in May, while economists at ANZ and Westpac have pencilled one in for February.