A fairly low number for underlying inflation will provide the Reserve Bank with a reason to actually cut rates. Joshua Williamson, Citigroup Bonds markets are signalling inflation in Australia is slowing, amid speculation that the nation's resource-driven growth is decelerating.
Money managers expect consumer prices to rise an average of 2.5 per cent annually in the next five years, the middle of the Reserve Bank of Australia's target and down from a 4- year high of 3.14 per cent on May 6, inflation-linked debt yields indicate.
Data today will show inflation eased in the three months to September 30, economists surveyed by Bloomberg predict.
Slower inflation increases the scope for RBA Governor Glenn Stevens to cut the developed world's highest borrowing costs to boost the economy as Europe's debt crisis weighs on confidence and cools demand for the minerals and energy that drive Australia.
The nation's mining boom kept the gap between yields on Australia's inflation-linked debt and rates on benchmark notes at the highest of eight developed markets tracked by Bloomberg.
"Weaker global growth will moderate some imported inflation," said Joshua Williamson, a senior economist in Sydney at Citigroup.
"A fairly low number for underlying inflation will provide the Reserve Bank with a reason to actually cut rates."
Investors are betting the central bank will reduce its overnight cash-rate target by more than a percentage point over the next 12 months from the current 4.75 per cent, according to a Credit Suisse Group index. A separate measure showed a 78 per cent chance the RBA will lower borrowing costs by a quarter of a percentage point at its November 1 policy meeting.
The outlook for inflation has held within 12 basis points, or 0.12 percentage point, of this year's low even as yields climbed on government bonds that aren't tied to consumer prices.
Australian government bonds are the world's second-best performers over the past year as employment growth slowed and confidence weakened, reflecting the European debt crisis and a tumble in shares that erased US$10 trillion of equities worldwide last quarter.
The country's debt returned 9.3 per cent in the past 12 months, the most after the 10 per cent gain for British government securities among 26 markets tracked by Bloomberg/EFFAS indexes.
The gap between yields on Australian five-year inflation-linked debt and benchmark notes of similar maturity shrank to 2.37 percentage points on October 4, the least since September last year.
The nation's debt linked to consumer price changes offered investors an 11.5 per cent return this year, the most behind the 12.6 per cent advance for similar New Zealand notes, Bank of America-Merrill Lynch indexes show.
Inflation pressures are also likely to ease as the impact of storms in Queensland diminishes, reducing food prices.