Price pressures are easing off, with Australia's annual inflation rate falling to 2.8 per cent, down from 3.8 per cent mid-year — slightly lower than expectations.

It's the lowest annual inflation rate in three and a half years.

According to the Australian Bureau of Statistics (ABS), prices rose by 0.2 per cent in the September quarter, compared to the 1 per cent rise in the three months through June.

"The [quarterly rise] is the lowest outcome since the June 2020 quarter fall, which occurred during the COVID-19 outbreak and was driven by free childcare," the ABS head of price statistics Michelle Marquardt said.

Prices of most goods and services continued to rise, but were offset by large falls in petrol, as global oil prices eased, and power prices, driven by government rebates across the states and territories.

"Without the rebates, electricity prices would have increased 0.7 per cent this quarter," Ms Marquardt said.

Goods inflation declined from 3.2 per cent annually to 1.4 per cent, as a result of the electricity and fuel price falls.

However, services inflation increased slightly, to an annual rate of 4.6 per cent in the September quarter — the main contributors being higher rents, insurance and child care prices.

Rate cut bets reduced as underlying inflation above target

The trimmed mean, a measure of underlying inflation which strips out the biggest price swings, fell to 3.5 per cent annually, down from 4 per cent the previous quarter and in line with market forecasts.

The Reserve Bank has forecast the headline annual rate of inflation to fall to 3 per cent by the end of 2024, but has tipped the trimmed mean to remain above its 2-3 per cent target band at 3.5 per cent.

Prior to the release of the consumer price index (CPI), markets had priced in around a 30 per cent chance of an interest rate cut by the end of the year, according to Bloomberg analysis.

After the CPI figures came through, that fell to about 20 per cent.

"Underlying inflation and persistent service sector inflation remains a concern and a rate cut this year is highly unlikely," Indeed economist Callam Pickering said.

"Quite simply, service sector inflation right now isn't compatible with meeting the RBA’s 2-3 per cent inflation target on a consistent basis.”

Mr Pickering does not expect the RBA to move interest rates until the unemployment rate or inflation deviate significantly from their forecasts, making the next few monthly inflation reports pivotal.

However, Deloitte Access Economics partner Stephen Smith argued there is already a clear case for a rate cut, "with inflation falling and households suffering".

"The ABS data shows that the price pressures that remain in the economy like rents, insurance premiums, and medical services, are predominatingly supply-side issues," he said.

"These cannot be subdued by further increases to the cash rate, supporting our view that interest rate hikes have done their job in slowing the economy and quashing demand-led inflation, strengthening the case for a rate cut."

Fruit and veggies keep grocery prices elevated

Food price inflation remained at 3.3 per cent on an annual basis — unchanged from the previous quarter.

Fruit and vegetable prices rose strongly, particularly for berries, grapes, tomatoes, and capsicums due to unfavourable growing conditions.

The cost of eating out and takeaways also increased, along with meat and seafood prices, offsetting a decline in dairy products.

Over the past 12 months, fruit and vegetable prices have risen 8.6 per cent.

Out-of-pocket childcare costs rose 3.2 per cent in the quarter, to be up more than 12 per cent over the year, as fees increased.

The ABS said childcare expenses for households remain very slightly below where they were last June, before the increased child care subsidy and expanded eligibility came in in July 2023.