The annual rate of inflation subsided to 1.3 per cent in the year to September, its lowest level since June 1999, and below the Reserve Bank's preferred target band.
But the result disguises solid price gains in the consumer price index (CPI) in the September quarter, and a stubbornly high rate of underlying inflation, confirming the likelihood of a rise in the bank's official cash rate next Tuesday.
The CPI rose 1.0 per cent in the three months to September, the Australian Bureau of Statistics said on Wednesday.
Treasurer Wayne Swan says the latest inflation figures show the economy is operating at spare capacity.
Asked about price pressures, Mr Swan said it was "very clear" inflation would remain subdued in the near term.
"What we're seeing here today is there is still a substantial spare capacity in our economy," Mr Swan told reporters in Canberra.
Mr Swan said future growth depended on alleviating capacity bottlenecks.
"What we have to do is put in place a range of policies that ensure we begin to grow even more strongly and we don't see a return to capacity constraints we saw in the past," Mr Swan said.
Mr Swan said a hike in the cost of utilities, such as electricity, water and sewerage, in some states had impacted on the quarterly figure.
"When you look at the basket in total, that has had a very big impact," he said, adding that it accounted for 0.4 of one per cent.
Mr Swan refused to blame directly Labor state and territory governments for the rises, but said there were some "unusually large increases" in electricity prices charged by state energy providers.
The outlook for business investment remained weak.
"Business confidence is much stronger, but the actual intention to invest is still weak," Mr Swan said.
Economists' forecasts had centred on a 0.9 per cent CPI rise in the quarter, for an annual pace of 1.2 per cent after growing 1.5 per cent in the year to June.
The Reserve Bank's two measures of underlying inflation showed an average 0.8 per cent rise in the quarter for an annual rate of 3.5 per cent, compared with 3.9 per cent in the year to June.
This remains well above the central bank's two to three per cent inflation target band.
Economists had expected the average of the two underlying measures of inflation to rise by 0.7 per cent in the September quarter, for an annual pace of 3.45 per cent.
The underling measures aim to smooth out volatile price swings, while indicating whether inflation pressures have become embedded in the economy.
© 2009 AAP
