Weaker than expected inflation figures for the December quarter may not prevent interest rate rises in 2011, as the nation adjusts to higher costs in the wake of the Queensland floods.

Australia's inflation rate slowed to 0.4 per cent in the December quarter, for an annual rate of 2.7 per cent, official data shows.

The market forecast had been for the headline consumer price index (CPI) to be 0.7 per cent in the quarter, for an annual pace of 3.0 per cent.

Meanwhile, the interest rate sensitive underlying measure came in at 0.4 quarter on quarter and 2.3 per cent year on year.

JP Morgan economist Ben Jarman said he doubted the underlying inflation figure, well inside the RBA's target of two to three per cent, will stop the central bank from raising the cash rate.

"There might be a knee jerk reaction here that the RBA has some time (before raising the cash rate)," he said.

"But they can't wait too long."

The central bank took the cash rate higher four times in 2010, from 3.75 per cent to its current 4.75 per cent.

Mr Jarman said he expected there to be inflationary pressures stemming from the reconstruction effort in Queensland after the state was devastated by recent flooding.

"We are still coming to grips with the impact of those floods," he said.

The Australian dollar slid after the release of the CPI, as expectations of a near term interest rate rise waned.

The local unit fell from its intra day high of 99.82 US cents to 99.30 cents in the minutes after the survey was released.