Retirees can expect some easing of inflationary pressures in 2012, with housing costs expected to retreat a little in line with falling house prices, while food costs are expected to drop in the first quarter of this year.

Data released this week by the Australian Bureau of Statistics (ABS) show the Pensioner and Beneficiary Living Cost Index (PBLCI) fell 0.2 per cent in the December quarter 2011, after a jump of 0.6 per cent in the September quarter.

That gave a year-on-year rise of 3.2 per cent, a sharp drop from 4.1 per cent in the third quarter of 2011.

Food prices drove the fourth quarter result down, falling 1.9 per cent, as fruit and vegetable prices started to return to normal, after spiking earlier in 2011 when severe flooding in Queensland disrupted supply.

Food prices were expected to fall further in the first quarter of 2012, according to RBS Australia.

Against this, transport costs rose 5.5 per cent over the year to 31 December, with higher petrol prices partly to blame.

Housing costs jumped 5.4 per cent, while insurance and financial services costs rose 5 per cent.

Overall inflation, as measured by the consumer price index (CPI), was flat in the December 2011 quarter, taking inflation to 3.1 per cent year-on-year, down from 3.5 per cent in the third quarter and a peak of 3.6 per cent in the second quarter of 2011.

Looking ahead, inflation is expected to moderate further in 2012, taking some pressure of retirees' living costs.

While utility costs were still expected to sting, with electricity pushing up retirees' living expenses, housing costs were expected to moderate, according to Westpac Bank senior economist Justin Smirk.

"We still see dwelling purchase costs remaining quite contained, so while housing may not act as a significant near-term disinflationary drag, nor will they return to the significant inflationary driver they were through 2008 and 2009," Smirk said.

This is highlighted by data released this week by the ABS that showed house prices fell 4.8 per cent nationally over the year to 31 December 2011, with price falls recorded in every capital city.

Westpac's preliminary forecast for the first quarter CPI in 2012 is a 0.7 per cent rise, which would see the annual rate dip to 2.2 per cent year-on-year. The bank's forecast for average core inflation, which strips out volatile items, is at 0.7 per cent for the first quarter of 2012 or 2.4 per cent year-on-year.

"Excluding the impact of the carbon tax, we see core inflation bottoming around 2 per cent a year in mid-2012," Smirk said.

The PBLCI is designed to measure the impact of price changes on the disposable incomes of households whose income is derived principally from government pensions or benefits.

Pension rates are adjusted each March and September by the greater of the increase in the CPI or the PBLCI, which is also used by the federal government to inform policy decisions relating to the indexation of base pension rates.