Australia's inflation rate rose a less-than-expected 0.4 per cent in the fourth quarter of 2010 and 2.7 per cent from a year earlier, official data shows.

Most economists had forecast a quarterly increase of 0.7 per cent, which would have taken the annual inflation rate to 3 per cent.

The inflation rate in the September quarter was 0.7 per cent, for an annual rate of 2.8 per cent.

The trimmed mean Consumer Price Index (CPI) rose 0.3 per cent in the December quarter, for an annual growth rate of 2.2 per cent, Australian Bureau of Statistics (ABS) data showed.

The Reserve Bank of Australia's weighted median CPI rose 0.5 per cent in the fourth quarter from the third and rose 2.3 per cent from a year earlier.

Economists had expected the average of the the RBA's two core measures of CPI to rise by 0.7 per cent in the December quarter, for an annual pace of 2.65 per cent.

The most significant price rises in the December quarter were for fruit, up 15.5 per cent; vegetables increasing 11.4 per cent; domestic holiday travel and accommodation, adding 3.8 per cent; and automotive fuel, lifting 2.1 per cent.

Meanwhile, the most significant offsetting price falls were in pharmaceuticals, down 6.2 per cent; deposit and loan facilities, declining 1.3 per cent; motor vehicles shedding 1 per cent; audio, visual and computing equipment, losing 4.8 per cent; and motor vehicle repair, down 1.9 per cent.

The ABS calculates the trimmed mean and weighted median measures on behalf of the Reserve Bank, which uses them to gauge the underlying trend in inflation.

Coming in below most economists' expectations, the latest inflation reading may buy the central bank some time on interest rates.

The RBA adjusts the cash rate to keep the inflation rate in a target band of 2 to 3 per cent over the medium term.

Just after the CPI result was announced, the Australian currency slumped from around 99.77 to 99.27 US cents, while the broader Australian market rallied about 25 points.

CMC Markets Sales Trader Ben Taylor said, "The fact the broader Aussie market rallied about 25 points just after the CPI result was announced is evidence that zero interest rate moves are a welcome relief, especially considering the devastation that has occurred in much of Queensland and Victoria."