The pace of inflation has slowed more than expected, suggesting the Reserve Bank's rapid-fire interest rate hikes are working.
The Australian Bureau of Statistics reported a healthy moderation in its monthly consumer price index to 4.9 per cent in the 12 months to July, down from 5.4 per cent in June.
Markets were anticipating 5.2 per cent annual inflation through to July, continuing to pull back from its peak of 8.4 per cent in December.
"It's pleasing to see inflation is moderating but we know it will remain higher than we'd like for longer than we'd like," Treasurer Jim Chalmers said.
While confidence grows among economists that inflation is losing its edge, there were a few reasons to remain cautious.
The bureau itself noted the fall is less dramatic when volatile items are stripped out, declining more modestly to 5.8 per cent in July, compared to 6.1 per cent in June.
The monthly index is also less comprehensive than the quarterly version, with only about 60 per cent of what's included in the full quarterly report captured in the July index.
KPMG economist Brendan Rynne said goods made up a substantial chunk of the July index, although it also showed welcome signs of moderating services inflation in line with slower wage growth.
Dr Rynne said falling automotive fuel prices, which sunk 7.6 per cent annually and made a generous contribution to the weaker result, would be unwound in September.
"This reflects the upward pressures from higher wholesale prices driven by the supply curbs by OPEC+," he wrote in a note.
Within the housing category, new dwelling prices continued to moderate in line with easing building material prices, but rents moved in the opposite direction to reflect a highly competitive market.
Electricity prices picked up 15.7 per cent in the 12 months to July but ABS head of prices statistics Michelle Marquardt said the federal government's energy bill relief took some of the sting out of the increases.
"If we exclude the impact of rebates from the July 2023 figures, electricity prices would have recorded a monthly increase of 19.2 per cent," Ms Marquardt said.
Price pressures may be easing but inflation is still higher than the Reserve Bank's two to three per cent target range.
The central bank has been jacking up interest rates in response to high inflation but has left the cash rate on hold for two consecutive months, fuelling speculation the tightening cycle is over.
EY senior economist Paula Gadsby said the cooling was further evidence that rate hikes are working, but it was still unclear if it would nail a soft landing.
Ms Gadsby said the reading would allow the RBA to stay on hold on September 5, with any future hikes later in the year dependent on the next round of inflation data and economic growth report.
"That looks increasingly unnecessary to us," she said.
New data from the construction sector was also released by the ABS on Wednesday, revealing a 0.4 per cent increase in total completed construction work.
The total number of dwellings approved fell 8.1 per cent in July, with sign-off on new units dropping sharply.