Australia's consumer price index (CPI) rose 0.4 per cent in the December quarter 2010, following a rise of 0.7 per cent in the September quarter, the Australian Bureau of Statistics (ABS) said.
The figure was below economists' expectations, which ranged from 0.6 per cent to 0.9 per cent.
The most significant price rises were for fruit, vegetables, domestic holiday travel and accommodation, and automotive fuel, the ABS said.
Offsetting this were price falls in pharmaceuticals, deposit and loan facilities, motor vehicles, audio-visual and computing equipment, and motor vehicle repairs, it said.
The CPI rose 2.7 per cent for the year to December quarter 2010, compared with a rise of 2.8 per cent through the year to September quarter 2010, the ABS said.
According to CommSec economist Savanth Sebastian, the inflation reading all but ensures that interest rates will remain on hold next week.
"And given that interest rate settings are already restrictive, it is looking likely that the next rate hike will not take place until well into the June quarter - especially given that there are parts of the economy like construction, manufacturing and the services sector going backwards," he said in a note.
"There is no question that inflationary pressures remain the hot button issue for the Reserve Bank.
"But not only is inflation going nowhere fast, the weaker reading on producer prices earlier in the week suggests that consumer prices should remain contained in the near term."
However, ANZ senior economist Riki Polygenis said she remains concerned about the medium-term outlook for inflation.
While the Reserve Bank is likely to look through a forecast temporary spike in the next few quarters stemming from higher fruit and vegetable prices, she said underlying inflation is expected to pick up rapidly in the second half of 2011.
In a note, Polygenis said the reconstruction following the Victorian and Queensland floods will coincide with an upswing in mining investment and put an additional strain on resources from mid-2011 onwards.
"In addition, greater demand for skilled workers at a time of reduced migration is also expected to push the unemployment rate back below 5 per cent and put upward pressure on wages," she said.
"We also note that this is occuring at a time of higher global agricultural price inflation as well as higher crude oil prices, both of which will ultimately feed through to domestic inflation.
"As a result of these influences, ANZ is now forecasting the underlying CPI to head towards the upper end of the target band by the end of this year and to rise above 3 per cent in 2012."
Source: Morningstar.com
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