Sharp increases in the cost of child care and tobacco were key drivers in a larger-than-expected rise in inflation in the final three months of 2020.
But with annual inflation still an extremely benign 0.9 per cent, a rise in interest rates remains a long way off despite signs of the economic recovery strengthening.
The Australian Bureau of Statistics' consumer price index also rose by 0.9 per cent over the December quarter, slightly higher than the 0.7 per cent increase predicted by economists.
It came as other figures showed business conditions growing to a two-year high in December, while consumer confidence recovered to a recent 14-month peak after overcoming recent jitters surrounding local COVID-19 lockdowns.
The International Monetary Fund has also upgraded its global growth forecast for 2021 to 5.5 per cent from 5.2 per cent, reflecting expectations of a coronavirus vaccine strengthening activity later this year.
"The fact that our economy is recovering and the jobs are coming back significantly ... is a function of us getting the virus under control," Treasurer Josh Frydenberg told ABC radio on Wednesday.
"The vaccine and its rollout is going to be critical to maintaining that momentum."
The ABS said the December quarter CPI was primarily impacted by an increase in tobacco excise and the introduction, continuation and conclusion of a number of government schemes.
The final unwinding of a free child care subsidy introduced during the depths of last year's recession led to a further 37.7 per cent jump in costs, with out-of-pocket expenses now returning to pre-COVID levels.
Tobacco increased by 10.9 per cent, but a 0.7 per cent rise in the cost of new homes would have been higher if not for government stimulus measures, like the $25,000 HomeBuilder grant.
Underlying measures of inflation - which smooth out wild price swings and are closely monitored by the Reserve Bank in terms of monetary policy - averaged an annual rate of 1.3 per cent.
This is still well below the Reserve Bank's two to three per cent inflation target.
"The underlying weakness will remain for quite some time, notwithstanding the strength of the economic recovery thus far," BIS Oxford Economics chief economist Sarah Hunter said.
"There is still some way to go before the labour market reaches full employment and upward pressure on wages resumes."
The National Australia Bank business survey for December showed conditions rose to a level last seen in September 2018.
"The improvement in conditions is broad-based and, importantly, driven by a big move back into positive territory for employment conditions," NAB chief economist Alan Oster said.
Consumers have also been buoyed by the decline in the unemployment rate to 6.6 per cent in December.
"The absence of community transmitted COVID-19 cases for a number of days and the relaxation in border rules has likely also supported confidence," ANZ head of Australian economics David Plank said.
The ANZ-Roy Morgan consumer confidence index - a pointer to future household spending - recouped its losses seen either side of the Christmas and New Year break.
Separately, the Westpac-Melbourne Institute leading index - which indicates the likely pace of economic activity three to nine months in the future - eased slightly in December after its recent strong recovery.
"It is still signalling healthy above-trend growth for the Australian economy in the first half of 2021," Westpac chief economist Bill Evans said.
"This is consistent with Westpac's view that the economy will grow by four per cent in 2021."
Australian Associated Press