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January 23 2013, 12:53AM

Unexpectedly slow growth in consumer prices could smooth the path to lower interest rates, but will not unnecessarily push the Reserve Bank of Australia down it.

The consumer price index rose only 0.2 per cent in the December quarter, according to Australian Bureau of Statistics (ABS) data on Wednesday, about half what economists had expected.

Annual inflation by this measure was 2.2 per cent, near the bottom of the RBA's target range of two to three per cent on average over time.

The target's 20th anniversary will be on March 31.

On that day on 1993, then-governor of the RBA, Bernie Fraser, said if inflation in underlying terms were to be held to that range on average "over a period of years, that would be a good outcome".

In the meantime, the RBA has shifted its focus to the headline CPI, because over time the underlying and headline measures tend to say much the same thing.

In any case, there's no doubt the RBA has hit the bullseye.

Between the March quarter of 1993 and the December quarter of 2012, the CPI has risen at an average pace of 2.76 per cent.

But that result was distorted by the one-off impact of the GST introduced in 2000.

Allowing for the effect of the new tax, the CPI rose at an average annual rate of 2.48 per cent.

The latest figures show the RBA's favoured measures of underlying inflation, the trimmed mean CPI and weighted median CPI, rising by 0.6 and 0.5 per cent respectively, with both posting annual rises of just 2.3 per cent.

It is a benign inflation environment.

And with the economy - and in particular the labour market - travelling in the slow lane at the moment, inflationary pressures seem more likely than not to ease further this year.

But this does not mean the RBA will feel compelled to vindicate widely held expectations that the cash rate will be cut from its current three per cent level in the next few months.

That's partly because the RBA may judge the economy to be growing close enough to its long-run potential pace to make further rate cuts superfluous, particularly with some residual effects of earlier cuts since late 2011 still expected to flow through.

And it's partly because the global financial crisis has reminded the RBA that ultra-low interest can do more than just boost economic growth at the risk of rising consumer prices.

The additional risk of a build-up in imbalances in financial markets has become a more important consideration for central bankers around the world, making the hurdle for rate cuts just a little higher than it was.

So, while inflation is important, the catalyst for further rate cuts by the RBA may turn out to be indicators of the pace of economic growth confirming the economy is growing slowly enough to warrant further stimulus.

Most notable among them will be the monthly employment data (next due February 7), the quarterly business investment survey (February 28) and the gross domestic product (GDP) figures (March 6) from the ABS.

By Garry Shilson-Josling, AAP Economist