SYDNEY Australia's inflation slowed to a 17-month low in July, driven by falls in holiday travel and fuel, while a measure of core inflation also cooled, in a sign interest rates might not need to rise again.

Data from the Australian Bureau of Statistics on Wednesday showed its monthly consumer price index (CPI) rose 4.9% in the year to July, down from 5.4% the previous month and under market forecasts of 5.2%.

A closely watched measure of prices excluding volatile items and holiday travel slowed to 5.8%, from 6.1%.

The Australian dollar slipped 0.3% to $0.6460 while three-year bond futures rallied 8 ticks to 96.26.

The slowing inflation reaffirmed market expectations that the Reserve Bank of Australia would pause its rate hikes for a third straight month in September, with a 99.5% probability, given policy is clearly restrictive.

"The sharp fall in inflation in July confirms that the RBA is done tightening and raises the chances that the Bank will start to ease policy earlier than most," said Marcel Thieliant, an economist at Capital Economics.

The RBA has jacked up rates by a whopping 400 basis points to an 11-year high of 4.1% since May last year, although incoming Governor Michele Bullock on Tuesday warned that rates may need to rise again as inflation is still too high.

So far, the flow of data has argued for an extended pause. Retail sales, which showed some resilience in July, were soft overall, wage gains underwhelmed and there were signs that the red-hot labour market might be turning.

Electricity prices - the biggest variable in the monthly report - rose 6% in July from June.

(Reporting by Wayne Cole; Editing by Muralikumar Anantharaman and Sam Holmes)