Inflation slowed in the final three months of 2011, as consumers price index dropped 0.3% in the quarter, bringing the annual pace to 1.8%, according to Statistics New Zealand.

The figure was well below the 0.4% rise expected in a Reuters survey of economists, who were picking the annual pace of inflation to be 2.6%, considering the CPI rose 0.4% in the September quarter.

The New Zealand dollar immediately fell against the US dollar, from 80.71 cents before the announcement at 10.45am to 80.32 cents just before 11am.

The drop was mostly attributed to a 2.2% fall in food prices, with the price of vegetables dropping 25% in the quarter, while cheaper telecommunication services and household items such as kitchenware, furniture and appliances added to the fall, TVNZ reported.

The price of vegetables was a major factor in the unexpected drop, as if it had not been so cheap, the CPI would have increased 0.1%.

"The larger-than -usual fall for vegetables reflects a supply shortage in the three months to September," Statistics NZ prices manager Chris Pike said in a statement, adding that there was a surplus of vegetables in the winter before dropping to normal levels by the end of the year.

Rising cost of transportation offset the quarterly fall, with a 5.8% increase in international air travel due to higher travel costs in Asia and Europe, and a 0.9% rise in petrol prices, according to TVNZ.

Transport group prices rose 5.7% in the calendar year, with an 11% increase in petrol prices.

The latest statistics mean the Reserve Bank will set aside worries over domestic price pressures, and can focus on the ripple effects of the debt crisis of the European Union.

The tradable component of the CPI fell 0.9%, its biggest fall since December 2008, while non-tradable CPI rose 0.2% in the quarter.

RBNZ Governor Alan Bollard will review monetary policy next week, and isn't expected to lift the Official Cash Rate (OCR) from its record-low 2.5% until the tail-end of this year.