Crucial inflation readout to determine RBA rate call

For the first time in more than a year, the chance of a Reserve Bank of Australia interest rate cut is "live".

Whether that plays out in February comes down to a crucial inflation readout on Wednesday, which will dominate the economic agenda for the week ahead.

The Australian Bureau of Statistics' quarterly consumer price index update for December is expected to come in below the RBA's forecast, which would prompt its board to give mortgage holders some much needed relief, economists at ANZ bank believe.

"We expect trimmed mean inflation to print at 0.5 per cent quarter-on-quarter, which would be the lowest quarterly result since Q2 2021," they said in a research report.

That would cause the annual figure for the RBA's preferred inflation measure to fall 0.3 percentage points to 3.2 per cent, below the central bank's forecast of 3.4 per cent.

Given the impact of government cost-of-living measures - such as electricity rebates and caps on childcare fees - on headline inflation, the RBA is more focused on getting "core" trimmed mean inflation back to its 2-3 per cent target band.

"With the RBA board's post-meeting statement in December noting it was 'gaining some confidence that inflation is moving sustainably towards target', we think that a downside surprise to the RBA's published forecasts ... will see the RBA cut in February," the ANZ economists said.

Commonwealth Bank economists also expect the the trimmed mean to come in at 0.5 per cent for the quarter, which they say should be enough to convince the Reserve Bank to cut.

AMP chief economist Shane Oliver says monthly CPI indicators and falls in final product price increases in business surveys point to good news for the inflation outlook.

While government subsidies were dragging down the index, lower new dwelling costs, slowing rent growth, flat household equipment and services prices and seasonal softness in clothing prices were all positive signs.

"So, if the trimmed mean inflation rate cools in line with our expectations it will be very hard for the RBA not to cut rates at its February meeting," Dr Oliver said.

But economists at NAB still think the RBA will want to wait a bit longer to get a better read on tightness in the labour market and soft economic activity.

"NAB continues to pencil in a first cut in May, but it is a close call," said NAB senior economist Taylor Nugent.

"February and April are live."

We could get an insight into the Reserve Bank board's thinking as soon as the day after the CPI release, with RBA assistant governor Brad Jones scheduled to speak at a super fund forum on Thursday.

Also on Thursday Australian time, the US Federal Reserve is expected to pause its monetary easing cycle as President Donald Trump's policies spur fears inflation could kick off again.

Wall Street's main indexes closed lower on Friday as investors stepped back while they digested a mixed bag of economic data and earnings reports and prepared for a week filled with economic releases and a Federal Reserve meeting.

The Dow Jones Industrial Average fell 140.82 points, or 0.32 per cent, to 44,424.25, the S&P 500 lost 17.47 points, or 0.29 per cent, to 6,101.24 and the Nasdaq Composite lost 99.38 points, or 0.50 per cent, to 19,954.30.

The indexes advanced for the second week in a row, with the S&P 500 up 1.74 per cent, while the Nasdaq rose 1.65 per cent and the Dow climbed 2.15 per cent.

Australian futures fell 10 points to 8371.

Australian shares finished higher for the fourth time in the week after Donald Trump demanded cuts in interest rates and the price of oil.

The benchmark S&P/ASX200 index on Friday finished up 30.2 points, or 0.36 per cent, to 8,408.9, while the broader All Ordinaries gained 31.3 points, or 0.36 per cent, to 8,660.4.