Next week's batch of inflation data will be pivotal to whether interest rates take another step down.

While consumers may be enjoying falling prices, the Reserve Bank board is not, and is likely to cut its already emergency cash rate setting of 1.75 per cent to a new record low next month.

Since when did low inflation become a worry?

Those who battled through Australia's last bout of double-digit inflation would most likely be perplexed about the current anxiety from economists about tumbling inflation.

Back then, home and business loans shot up to around 20 per cent in a bid to slay the inflation dragon, although the ugly side-effect was a recession which slayed the dreams of many borrowers.

The flip side of a super-heated economy is stagnation, faltering growth and falling prices as demand evaporates.

The worry about low inflation is that it may prompt a buyers' strike, as consumers put off purchases in the expectation prices will fall even further in the future.

This feeds into a downward spiral of lower growth, lower interest rates and lower inflation.

Why is 'inflation targeting' a thing?

Inflation targeting became "a thing" for central bankers in the late 1980s, although the fear then was high inflation.

In 1993, the then Reserve Bank governor Bernie Fraser gave the target some form, declaring inflation kept in a band of "2 to 3 per cent over a period of years would be a good outcome", and that has been the RBA's central dogma ever since.

The RBA's mission statement on monetary policy notes: "Controlling inflation preserves the value of money and encourages strong and sustainable growth in the economy over the longer term".

So, if inflation climbs above 3 per cent and looks like staying there over the RBA's medium term, it is likely official rates will be pushed up to rein it in.

Equally if inflation falls below 2 per cent for a while, rates will probably be cut to give the economy a bit more momentum.

The RBA can point to inflation averaging around 8 per cent in the decade before targeting and around 2.5 per cent since - not to mention 25 years free from recession - as proof it has been successful pulling its monetary levers.

Interestingly the first cash rate set by the RBA in 1990 was a range of 17 to 17.5 per cent, when inflation was rollicking along at 7 per cent.

While it has been a bumpy path, the trend has been downward ever since.

Inflation, deflation and disinflation

With rising inflation ruled out of the RBA's equation - for time being at least - the focus now turns to disinflation and deflation; two terms which often seem to be interchangeable in the media, but are in reality quite different.

Deflation is nasty. Prices fall and continue to fall.

Japan's "Lost Decade" - which is actually now well into its third decade - is most commonly cited as an example of the damage deflation can cause.

After a debt-inspired asset bubble burst in 1989, prices across the board fell sharply, as did wages and investment, shrinking the economy alarmingly.

Despite official interest rates now below zero, almost 30 years later the Japanese economy has not regained its vigour.

Australia on the other hand is experiencing the far more benign disinflation, where inflation is slowing; prices are still going up, but not as rapidly as they were, thus bringing the inflation rate down.

However, there is a significant risk that dangerously low inflation may become entrenched.

The world is stuck in a low inflation rut

We're not alone in this low inflationary world as a combination of the aftermath of the GFC, low growth and technological advances and digitally disrupted industries drive prices down.

While there is a hint of inflation edging up in the US, it comes from a very low base and with very low expectations of much of a rise.

Europe's inflation is virtually non-existent - around 0.3 per cent this year - and Japan appears to have stalled, with predictions that it may end the year in deflation again.

China has a sniff of inflation, but it is confined to domestic food rather than the products it exports.

Bond markets 'pricing lower growth'

With the economy plodding along with historically low wages growth, Australia is now also importing low inflation via such things as cheaper electronic goods, clothes and cars.

"Bond markets globally already are pricing a lower growth, lower inflation environment and Australia can't escape these forces," said Citi economist Paul Brennan.

"This in turn means that the RBA will inexorably be forced to lower the cash rate towards global levels even though the economy is performing relatively well."

So do we have good low inflation or bad low inflation?

Market Economics principal Stephen Koukoulas said it is the former ... for now.

Well, we're not in recession, so it is not bad inflation at the moment.

However, the minutes from the RBA's July meeting infer inflation is low and expectations remain below average.

Headline consumer prices in the first quarter fell 0.2 per cent - rising only 1.3 per cent over the year.

The market view is that consumer prices will rise 0.5 per cent in June quarter, which would still drag the annualised rate down to 1.1 per cent, the slowest price increases since 1999 and the seventh consecutive quarter below the RBA's target band.

Using the RBA's preferred measure of underlying CPI - stripping out volatile items such as food and fuel - inflation is forecast to slip down a notch to a fresh record low 1.5 per cent over the year.

Mr Koukoulas said the current situation is like a football match where your team is a couple of goals down early on.

"It doesn't mean you are going to lose, but you want to rein it in before it gets out of hand," he noted.

What will the RBA do?

UBS economist Scott Haslem said the RBA would cut its cash rate rates by 25 basis points to 1.5 per cent if the underlying CPI rises by 0.5 per cent or less over the quarter.

"0.6 per cent would be a closer call, as it could rounded up to 1.75 per cent over the year - above the RBA's forecast - and suggests the first quarter was an outlier," Mr Haslem noted.

Bank of America Merrill Lynch economist Alexandra Veroude told clients the RBA is likely to be disappointed with both headline and underlying inflation measures falling below its own modest forecasts and will cut at its August meeting.

"We believe that the RBA will be unable to ignore core inflation falling further below the target band - and missing its forecasts - as additional easing would add support to the growth outlook," Ms Veroude argued.

"The RBA must be less convinced of domestic cost pressures causing inflation to return to the target band as all the jobs created this year have been in part-time employment."

The market agrees a cut is likely, pricing in the likelihood around 66 per cent.

The fear of arcing up another surge in house prices and the belief that the March quarter had a rogue element to it prevents the decision being a lay down misere.

However, as Mr Koukoulas noted, the RBA probably should cut because it can afford to and in doing so it is not about to blow inflation through the roof again any time soon.