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," she said.

With the headline rate dropping to 2.7 per cent, it has fallen back inside the RBA's 2-3 per cent target band for inflation. The last time it was inside the target band was in August 2021.

However, the RBA really wants the "trimmed mean" measure of inflation to fall back into the target band, and it is still sitting above it, at 3.4 per cent.

Electricity prices fall by record 17.9 per cent

Michelle Marquardt, ABS head of prices statistics, said government energy rebates and lower fuel prices played a big role in driving inflation lower last month.

She said the combined impact of Commonwealth Energy Bill Relief Fund rebates and state government rebates in Queensland, Western Australia and Tasmania, drove the largest annual fall in electricity prices on record of 17.9 per cent.

She said automotive fuel prices were also 7.6 per cent lower last month compared to August 2023.

However, she said the "trimmed mean" measure of inflation, which excluded last month's big falls in electricity and fuel prices, still managed to decline from 3.8 per cent to 3.4 per cent, which is its lowest reading for 2.5 years.

And according to the RBA's official forecasts in August, the RBA expects trimmed mean inflation to be 3.5 per cent by the end of this year. 

But Ms Bullock has said the ABS's monthly inflation indicator series is not as comprehensive as the ABS's quarterly inflation data, and her forecasts should be compared against the quarterly inflation data.

The ABS's next quarterly numbers will be released on 30 October. 

Decline in inflation is still a good thing

Federal Treasurer Jim Chalmers says the inflation numbers are "very welcome and encouraging".

"They show our policies are helping in the fight against inflation, but we're not complacent because we know people are still under pressure," he said.

"The monthly figures can jump around which is why the quarterly data is the official measure of inflation, but the moderation in today's numbers is very heartening."

And economists say the decline in headline and underlying "trimmed mean" inflation is obviously welcome.

"The notable drop in underlying inflation in August is a welcome development and marginally increases the chances of a pre-Christmas interest rate cut," wrote BetaShares chief economist David Bassanese.

"The decline in headline inflation is also encouraging even after stripping out the effect of electricity subsidies."

ANZ senior economist Catherine Birch said she didn't expect these numbers to make a huge impact on the RBA's thinking, given services inflation is still running at a "sticky" 4.2 per cent year-on-year.

But the decline in trimmed mean inflation was still a positive sign.

"We continue to expect the RBA to hold the cash rate at 4.35 per cent until the first 25 basis point cut in February next year," Ms Birch wrote.