Australia's core inflation rate rose at its slowest pace in 14 years in the June quarter giving the Reserve Bank more room to cut official interest rates again.

The so-called headline inflation figure came in at 0.5 per cent, the Australian Bureau of Statistics reported, less than the 0.6 per cent rate predicted by analysts.

On an annual basis, prices for the June quarter were up 1.2 per cent, also shy of the 1.3 per cent pace economists had tipped.

"It gives (the RBA) scope to cut if they feel they need to," said St George acting chief economist Hans Kunnen. The CPI numbers "reflects not weakness in the economy but in consumer spending".

The inflation figures are closely watched by the central bank when it sets official interest rates. A low reading typically gives the Reserve Bank more scope to lower rates although its decision also hinges on other factors, including the state of the global economy.

Still, by the central bank's preferred gauge of inflation - the average of the so-called weighted median and trimmed mean measures - the rate has dropped to just 1.95 per cent. That's the lowest reading since the June quarter of 1998.

The dollar initially eased about 0.2 of a US cent to US$1.0175 as investors increased their bets that the RBA will cut official interest rates again when it meets on August 7. The dollar, though, has since clawed back that drop in recent trading as investors found no big surprises lurking in the data.

PRESSURE ON THE PURSE

While the RBA juggles arcane price gauges, though, the prices people paid over the counter increased for many household goods.

Vegetable prices jumped 5.2 per cent in the quarter, while medical services rose 2.8 per cent and rents increased 1.1 per cent, the ABS said.

Less costly were electronics prices, which fell 4 per cent in the quarter, while the cost of travel fell 4 per cent, the bureau said.
 
Also rising were medical services, which increased 2.8 per cent and rents increased 1.1 per cent, the ABS said.

For the year to June, food and non-alcoholic beverages were down 3.2 per cent, while housing costs increased 3.4 per cent, health costs 3.6 per cent and education 2.9 per cent.

WILL THE RBA CUT?

While today's inflation update suggests the RBA has room to lower rates again without risking the economy overheating, economists reckon the central bank will hold its fire.

Core inflation is now outside the bank's preferred 2-3 per cent target range, but it's already cut the official interest rate by 125 basis points (or 1.25 percentage points) since last November and it wants to see how much of an impact those cuts will have on the wider economy.

The central bank also knows that the current quarter will contain big rises in electricity and other other costs, some of them associated with the introduction of the carbon tax earlier this month.

It's also keen to keep some powder dry as Europe's debt crisis and China's economic slowdown play out. And, as RBA governor Glenn Stevens said yesterday, the state of the Australian economy is "not too shabby", with low unemployment and prices remaining in check.

St George's Kunnen believes the RBA will wait until September or October to lower interest rates again.

Still, should confidence "evaporate" because of problems in Greece or Europe, the RBA has the scope and willingness to cut sooner, he said.

Citi's senior economist Joshua Williamson sees today's inflation figures as "right on the sweet spot where the Reserve Bank was expecting".

"Inflation is low and sustainable but it's not low enough to encourage a rate cut in August," he added. "The next move is probably November."

No surprises

Other economists agreed that the RBA is unlikely to shift its view of the economy based on today's inflation numbers.

"I don't think the RBA will be surprised in any meaningful way" by today's CPI figures, said JP Morgan economist Ben Jarman.

Without a big surprise, there's little reason to expect the RBA will take early advantage of the scope it has to cut interest rates again if needed.

"We're expecting no rate cut in August now from the RBA," said Andrew Salter, foreign exchange strategist for ANZ. "I think the interpretation you'll get from the market is we're basically unchanged in the Australian dollar after the release."

- Sydney Morning Herald