The Australian Bureau of Statistics will hand down its latest consumer price index update this week with the central bank looking at trimmed mean inflation, which examines the middle 70 per cent of price changes.

Trimmed mean inflation rose 3.5 per cent in the 12 months up to September and is expected to drop by 0.3 per cent.

This is below the central bank’s forecasted drop to 3.4 per cent, sparking hopes it will cut rates by 25 basis points in February.

However, headline inflation was down to 2.8 per cent in September and was strongly influenced by government energy bill rebates.

Shane Oliver, chief economist at AMP, on Monday said the RBA was likely to start cutting rates in February if inflation dropped as he expected.

“If it (trimmed mean inflation) comes in where we expect at 0.5 per cent or 3.2 per cent for the year, I think it will be very hard for the RBA not to cut when they meet in February,” Mr Oliver told Sky News Australia.

He pointed to monthly inflation data released at the start of January, which showed trimmed mean inflation drop to 3.2 per cent in the 12 months to November.

“We are reasonably optimistic here. We have seen increasing evidence through the monthly inflation numbers that have been released up to November that things are going in the right direction,” Mr Oliver said.

“But it’s not certain. I’d have to say it’s about a 70 per cent chance they’ll cut in February, but it all does come down to the trimmed mean or the underlying rate of inflation comes in on Wednesday.”

Alongside trimmed mean inflation, the RBA will also look at unemployment figures.

The unemployment rate rose by 0.1 per cent in December with 56,300 new jobs created during the month – far higher than the 15,000 expected by the market.

The stock market is factoring in a 78 per cent chance of a rate cut in February, while ANZ and Commonwealth Bank predict the central bank will cut rates next month.

Inflation has fallen from 6.8 per cent in December 2022 after soaring from the 1-2 per cent range in the second half of 2021.

Prime Minister Anthony Albanese on Sunday defended the government’s role in bringing inflation down while providing cost of living relief for Aussies doing it tough.

“We have done all we can as a government to create better conditions for monetary policy to work together with what the government has done,” he told Sky News.

“This has been like landing a 747 on a helicopter pad.”

When the RBA kept the cash rate on hold during its December meeting, the central bank noted some improvements in the economy.

“The Board is gaining some confidence that inflationary pressures are declining in line with these recent forecasts, but risks remain,” the RBA said in a statement.

However, RBA Governor Michele Bullock said trimmed mean inflation, which is currently at 3.5 per cent, is still too far away from the midpoint of the target 2-3 per cent band.

"The most recent forecasts published in the November Statement on Monetary Policy (SMP) do not see inflation returning sustainably to the midpoint of the target until 2026," she said.

Interest rates have been held at 4.35 per cent since November 2023 after the RBA starting increasing rates in May 2022.