Trimmed Mean: Australia’s Clearer Inflation Indicator in 2025

Inflation headlines dominate the news, but beneath the surface, the ‘trimmed mean’ is quietly revolutionising how Australians understand price changes. As cost-of-living pressures persist in 2025, grasping this statistical tool is more relevant than ever.

What Exactly Is the Trimmed Mean?

The trimmed mean is a statistical method used to measure underlying inflation by filtering out the most extreme price movements—both the biggest rises and falls—from the Consumer Price Index (CPI) basket. In Australia, the Reserve Bank (RBA) and the Australian Bureau of Statistics (ABS) use the trimmed mean as a core inflation gauge, believing it offers a more stable, reliable indicator of inflation trends than the raw headline CPI.

Here’s how it works in practice:

• Step 1: Arrange all price changes in the CPI basket from lowest to highest.
• Step 2: ‘Trim’ (remove) the top and bottom 15% of price movements, eliminating outliers like volatile petrol prices or seasonal food items.
• Step 3: Calculate the mean (average) of the remaining 70% of price changes—this is the trimmed mean inflation.

This approach smooths out short-term volatility, revealing the underlying inflation trend that’s more relevant to household budgets and policy decisions.

Why the Trimmed Mean Matters in 2025

With global and local shocks—think supply chain disruptions, energy price spikes, or climate impacts—headline inflation can swing wildly. In 2025, the ABS continues to publish both headline and trimmed mean inflation figures. While headline CPI for Q1 2025 showed a 3.9% annual increase (driven by a surge in energy and rental costs), the trimmed mean registered a more moderate 3.2%, reflecting the persistent but less extreme underlying price pressure.

This distinction is crucial. The Reserve Bank of Australia now gives trimmed mean inflation even greater weight when setting interest rates, aiming to avoid knee-jerk reactions to temporary price shocks. For example, while fruit and vegetable prices spiked after recent flood events, these were ‘trimmed’ from the calculation, helping the RBA maintain a steady hand on monetary policy.

Real-World Impacts: Households, Businesses, and Policymakers

• For Households: The trimmed mean offers a truer sense of whether inflation is really eroding purchasing power, or if headline figures are being skewed by temporary anomalies.
• For Businesses: Long-term planning—such as wage negotiations or contract pricing—relies on the trimmed mean for a less distorted outlook on inflation.
• For Policymakers: The RBA’s inflation target (2–3% over the cycle) is now most closely tracked via the trimmed mean. In 2025, with trimmed mean inflation hovering near the upper end of the target band, policymakers face tough calls on rate settings.

Case study: In early 2025, a global oil price spike pushed petrol prices up 15% in a single quarter. The headline CPI soared, but the trimmed mean inflation moved only slightly, guiding the RBA to hold rates steady rather than overreact to a short-term shock.

How to Use Trimmed Mean Data in Your Financial Decisions

With trimmed mean inflation now a regular feature in bank statements, super fund forecasts, and wage negotiations, understanding it can help you:

• Assess whether your income is keeping pace with ‘real’ inflation
• Evaluate investment returns against a less volatile inflation benchmark
• Stay informed about the RBA’s likely policy moves

Financial commentators in 2025 increasingly recommend watching the trimmed mean as your inflation compass, rather than the headline CPI alone.

Conclusion

As the Australian economy navigates uncertain waters, the trimmed mean has emerged as a vital lens for seeing through inflation’s noise. Whether you’re budgeting for groceries, setting salaries, or following the RBA’s next move, this unsung hero of statistics offers clarity in a world full of volatility.