Inflation based on wholesale prices declined marginally to 7.18% in December even though rates of food items like rice, wheat, pulses and potato showed a rise.
The Wholesale Price Index (WPI) was 7.24% in November and 7.32% in October. It was 7.74% in December, 2011.
The third successive fall in inflation may prompt the Reserve Bank to cut interest rates in its policy review on January 29.
Food inflation, as a category, rose to 11.16% in December against 8.50% in the previous month. Food articles have 14.3% share in the WPI basket.
While wheat turned more expensive by 23.23% in December from 23.19% in November, rice became dearer by 17.10% from 11.80%.
Potatoes were costlier by 89.08% and onion by 69.24%.
Milk prices declined by 5.85%, while fruits were down by 5.76%.
Eggs, fish and meat prices too moderated to 10.18% compared to 14.19% in the previous month.
For the fuel and power category, inflation was 9.38% compared to 10.02% in November.
The rate of price rise in the manufactured products moderated to 5.04% in December as against 5.41% in the previous month.
Inflation for October was revised downwards to 7.32% from provisional figure of 7.45%.
Retail inflation in December crossed double digit mark at 10.56%, driven by higher prices of vegetables, edible oil, pulses and cereal.
Industrial output growth rate had contracted by 0.1% in November, from a robust 8.3% in October.
Concerned over the persistent inflation, the RBI has kept key interest rates unchanged since April, 2012.
The repo rate, at which RBI lends to the banks, has been retained at 8 per cent, while the reverse repo, at which RBI absorbs excess liquidity through borrowings from banks, is at 7%.