Consumer prices have risen by 1.6 per cent from the June quarter to the September quarter, driven by the end of temporary free childcare and higher petrol prices.
The Australian Bureau of Statistics (ABS) said the Consumer Price Index (CPI) rose 0.7 per cent over the year to the end of September, in line with forecasts by economists.
Over the June quarter, prices went backwards, known as deflation, with the CPI slumping by 1.9 per cent after the Federal Government temporarily made childcare free from April to mid-July to help families survive the economic fallout from the coronavirus pandemic.
It was the biggest quarterly fall in the 72-year history of the index as childcare fees dropped by 95 per cent.
Childcare fees and more expensive petrol move inflation
Childcare was the most significant price rise in the CPI from June to September,with the cost of pre-school and primary education jumping 11.1 per cent after free childcare ended on July 13, and the Child Care Subsidy was reintroduced.
Over the quarter, food prices dropped by 0.4 per cent, alcohol and tobacco prices rose 1.6 per cent and transport prices jumped by 3.4 per cent as the cost of petrol and cars increased.
ABS Head of Prices Statistics Andrew Tomadini said without the rise in childcare, the CPI would have increased by 0.7 per cent.
"Significant rises were also recorded in the September quarter for automotive fuel (9.4 per cent) following a rebound in world oil prices, and pre-school and primary education (11.1 per cent), with before-and-after school care no longer being free," he said.
Mr Tomadini said strong demand and supply shortages led to price rises and less discounting for many products, such as furniture and household appliances.
COVID-19 sees cost of renting drop
Rents fell again in most capital cities over the quarter because of weak demand for properties and high vacancy rates amid the economic impact from coronavirus with nearly one million Australians out of work.
They recorded their first annual fall in history.
Property rates and charges also declined as councils provided discounts, rebates and rate freezes.
Prices also dropped for water and sewerage (-4.5pc), personal care products (-3pc), urban transport fares (-3.5pc) and pharmaceutical products (-2.1pc), which decreased as more people qualified for subsidies under the Pharmaceutical Benefits Scheme because of the tough economic conditions.
The rebound in inflation was the strongest in Brisbane (+2.3) and Canberra (+2.3pc).
Melbourne saw the slowest rise in prices (+0.9pc) because of the tough coronavirus lockdowns as shops were shut and childcare remained free in Victoria.
Free childcare 'really helpful' for families
Free childcare might not have been good news for Australia's economy, but it was for the Holland family.
"It was really helpful, because everything had changed with jobs, and my husband's job was looking a little bit shaky at the time as well, so to have the burden eased a little bit financially was really helpful," said Natalie Holland.
The mum of three boys works four days a week as an occupational therapist and her husband Craig, a civil engineer, manages safety and maintenance at Sydney Airport.
Their youngest child, five-year-old Samuel, attends childcare three days a week.
Not having to pay childcare costs of $1,000 a month between April and mid-July was a decent saving for the family.
"We could put some money towards our mortgage and get in a more secure position," Ms Holland told The Business.
They were also able to use some of the money they saved to go on a family holiday in New South Wales.
Reserve Bank expected to cut rates to record low on Melbourne Cup day
The measures of underlying inflation, which strip out volatile items and are closely watched by the Reserve Bank, were more subdued.
The trimmed mean rose 0.4 and the weighted median rose 0.3 per cent.
Inflation is well below the Reserve Bank's target range of 2 to 3 per cent, amid the first recession in Australia in nearly 30 years, compounded by the economic shutdowns and government lockdowns to stop the spread of COVID-19.
EY chief economist Jo Masters told The Business that the rebound in inflation reflected Government policy and higher fuel prices rather than an economic recovery, which was expected to be "long and bumpy."
"Very low inflation may be welcomed by households who are facing a weak labour market and soft wage growth, but it is indicative of a weak underlying economy."
"It is a reminder of just how disruptive COVID has been to our economy and how weak the inflation pulse is," she said.
Ben Udy, Capital Economics Australia and New Zealand economist, said underlying inflation would remain low for years.
"We expect headline and underlying inflation to ease in the months ahead."
"Underlying inflation is likely to remain subdued as slack in the labour market weighs on wage growth," he said.
Most economists surveyed by Reuters also predict an RBA rate cut next week with a 0.15 per cent reduction forecast to a new record low of 0.1 per cent.
The central bank is also expected to ramp up its bond buying program to help the battered economy.
Meanwhile, with childcare fees back on the table, the Holland family are again trying to balance the books.
"It's back to being as tight as it was before and we need to count the pennies a bit more again," Ms Holland said.