The Australian TD Securities - Melbourne Institute monthly inflation gauge lifted 0.2 per cent in December, with price increases for fuel, fruit and vegetables, holiday travel and accommodation contributing the most to the rise, according to data released on Monday.

The gauge climbed 0.4 per cent in November and 0.3 per cent in October. On an annual basis, inflation rose 3.8 per cent, the December data showed, just down from November's annual 3.9 per cent reading.

"Uncomfortable inflation pressures emerged in the final months of 2010," head of Asia-Pacific Research at TD Securities, Annette Beacher, said.

"As the Reserve Bank of Australia has already taken a pre-emptive stance against future inflationary pressures by shifting to a restrictive monetary policy stance late last year, we expect the RBA to remain on the sidelines until May," she said.

JP Morgan said Australia's inflation risk had intensified due to the post-flood rebuilding programs about to commence and given that the economy was already at "full employment."

It said the independent central bank could be forced to tighten rates more assertively in the medium term.

Early forecasts from analysts suggest economic growth for the current quarter could be halved to around 0.4 percent, but that would be made up in the next couple of quarters by spending on reconstruction and replacing damaged goods.

The floods were also likely to cause a spike in some food prices, lifting inflation modestly in the current quarter, while the huge scope of the rebuilding could add to price and wage pressures later in the year.

As a result, analysts see little chance of the RBA raising interest rates again in the next two to three months, but a heightened risk of tightening once the full impact of the reconstruction is felt.

With Reuters