Australia inflation rate has continued to undershoot Reserve Bank expectations with the cost of living rising by 1.7 per cent over the year to the end of September.

Key points: The probability of a rate cut next week fell to just 5 per cent after the higher-than-expected inflation data was released

The probability of a rate cut next week fell to just 5 per cent after the higher-than-expected inflation data was released Inflation rose 1.7 per cent over the year, up from 1.6 per cent at the end of the June quarter and roughly in line with RBA expectations

Inflation rose 1.7 per cent over the year, up from 1.6 per cent at the end of the June quarter and roughly in line with RBA expectations Travel, tobacco, rates and child care pushed inflation higher but were offset by cheaper housing, fresh fruit and utilities prices

The RBA's preferred measure of underlying inflation, stripping out volatile items such as food and fuel prices, came in at 1.6 per cent, roughly unchanged.

Underlying inflation has been anchored under the RBA's 2-to-3 per cent target band since early 2016.

While inflation remains weak, the September-quarter result is marginally ahead of expectations and further eases pressure on the RBA's need to cut interest rates next week given unemployment edged down in September.

The market's initial reaction saw the odds of a rate cut on Melbourne Cup day slashed to just 5 per cent, while the Australian dollar edged up.

While headline annual inflation edged up from the previous reading, the September quarter traditionally sees solid price rises in highly taxed and regulated sectors such as tobacco and property rates.

Stripping out seasonal impacts, inflation was a much softer 0.3 per cent over the quarter rather than the 0.5 per cent headline.

Housing subdues inflation

"Annual inflation remains subdued, partly due to price rises for housing-related expenses remaining low, and in some cases, falling in annual terms," Australian Bureau of Statistics chief economist Bruce Hockman said.

"Prices for utilities [-0.3 per cent] and new dwelling purchases by owner-occupiers [-0.1 per cent] both fell slightly through the year to the September 2019 quarter, while rents [0.4 per cent] recorded only a small rise."

Mr Hockman said despite falls in fruit and vegetable prices over the quarter, the drought was starting to have an impact on a range of other foods.

"Prices rose this quarter for meat and seafood [+1.7 per cent], dairy and related products [+2.2 per cent] and bread and cereal products [+1.3 per cent]," he said.

International travel (+6.1 per cent) was the most significant contributor to the rise in inflation, while property rates and child care both rose 2.5 per cent.

Fuel slipped 2 per cent — the price spike from the attack on Saudi facilities occurring too late in the quarter to have much of an impact.

Rates on hold

CBA economist Kristina Clifton said there were some tentative signs low inflation may be bottoming out.

"The percentage of the CPI [consumer price index] basket rising at less than 2 per cent has dropped to its lowest level since [early] 2015, while underlying inflation annualised over the past six months has lifted a little too," Ms Clifton said.

While noting the flexibility of the RBA's approach, Ms Clifton said with core inflation under the target band for almost four years, more needed to be done.

"Fifteen quarters of misses is starting to feel like a long time, and it's likely to be a very several more years until inflation picks up to target," she said.

The CBA house view is interest rates will be on hold for the rest of this year, but another cut is likely in February.

"Given the three cash rate cuts since June, we think that the RBA will want to take some time to assess the impacts of lower interest rates before deciding on their whether to cut again," Ms Clifton said.