Consumer prices rose 0.5 per cent in the June quarter, climbing only 1.2 per cent over the past financial year.
That is the lowest annual inflation rate since the June quarter of 1999.
The Bureau of Statistics figures show the biggest price rises in the quarter were for medical and hospital services (up 2.8 per cent), rents (up 1.1 per cent), vegetables (up 5.2 per cent) and furniture (up 4.5 per cent).
The biggest price declines were for domestic travel and accommodation (down 4 per cent), audio, visual and computing equipment (down 3.8 per cent), and cakes and biscuits (down 2.8 per cent).
The Reserve Bank's preferred measures of inflation also eased to 0.6 per cent over the quarter, and the annual figures were just under the Reserve Bank's 2-3 per cent target band.
Among the capital cities, Darwin had the strongest price gains during the June quarter (up 0.9 per cent), with Sydney, Brisbane and Canberra all seeing a 0.6 per cent price increase, Melbourne and Perth 0.5 per cent average prices rises and Adelaide a 0.3 per cent increase.
Residents of Hobart actually saw prices fall 0.4 per cent, in yet another sign that the Tasmanian economy is severely lagging the rest of the nation.
Citi senior economist Joshua Williamson says the weak inflation data was expected by the markets and the Reserve Bank, and does not increase the chance of a rate cut in August.
"Inflation is low and sustainable but it's not low enough to encourage a rate cut in August.
Basically this is right where the RBA wants it and their forecasts were done prior to the May and June rate cuts, so it's a result that shouldn't move markets and should see a bit more squeezed out of expectations for a rate cut in August," he told Reuters.
"The next move is probably November, if you look at the mix of history and based on the risks from here, they can probably do one more [cut] of 25 basis points in November." HSBC's chief economist Paul Bloxham agrees the Reserve Bank may not be in a rush to cut next month.
"It certainly means that there is room to do more, the door is open.
The Reserve Bank could cut interest rates further if they need to - they're not constrained by inflation," he told the ABC's The World Today program.
"But of course they've already gone by 75 basis points over the past three months, and we're already starting to see some signs that that's providing some support domestically.
The next move really depends on global developments." Currency traders seemed to broadly agree with these analyses, pushing the Australian dollar slightly up off morning lows just below 102 US cents, to 102.3 US cents by 1:18pm (AEST).
Federal Treasurer Wayne Swan says the inflation figures should give Australians a reason to be optimistic and to reject doomsayers who talk the economy down.
"I think these figures should give all Australians confidence in our economic fundamentals and to give us confidence at a time when there is volatility elsewhere in the world."