Thanks to the strong dollar and shy consumers, plus the growing price war between Coles and Woolies, Australian inflation surprised on the downside in the December quarter.

The headline rate for the CPI showed a 0.4% rise in the quarter, down from the 0.7% in the September quarter and well under the confident expectations from market economists for a 0.7% rise (and higher from a couple of forecasters).

That was despite the expected sharp jump in fruit (up 15.5%) and vegetables (up 11.1%)in the quarter, an increase that is likely to be repeated to some extent this quarter because of the floods. They drove food prices up by 2.2% in the quarter, which was the biggest rise among all the groups in the CPI survey.

The annual headline rate was 2.7% down on the 2.8% (restated) for the year to September.

The underlying rate used by the Reserve Bank fell to the lowest level in a decade, and yet many in the markets remained unconvinced and were busy forecasting more price doom and gloom this quarter, after getting it wrong in the December quarter.

That would normally raise the prospect of a rate cut in coming months, but the floods and the underlying price pressures from the resource boom will see the RBA sit pat for as long as possible

The impact of the stronger dollar can be seen in the