The rate of inflation has slowed to 1.8% for the year to the end of December.
Statistics New Zealand released its Consumers Price Index on Thursday showing that prices fell 0.3% in the December quarter - the first quarterly drop in two years.
The latest annual inflation rate has fallen from 4.6% in the year to the end of September.
Lower food prices - the biggest contributor to the fall - have reflected an easing in winter shortages of vegetables and prices returning to more normal levels.
The price of communications, household contents, clothing and alcohol also fell.
Transport costs, including international airfares, petrol, second-hand cars, recorded the biggest price increases for the quarter.
The price inflation slowdown came as the October 2010 increase in the goods and services tax (GST) dropped out of Statistics New Zealand's calculations.
More discounts likely
The head of the Retailers' Association says discounting could continue to benefit shoppers this year.
Statistics New Zealand says discounting by retailers was heavier in the final three months of 2011 than in the previous three months.
Radio New Zealand's economics correspondent says that trend could continue this year, with a recent survey of businesses by the Institute of Economic Research showing firms are carrying high inventories.
Retailers Association chief executive John Albertson says stocks are higher than normal after a disappointing Rugby World Cup for retailers and only some were sold during the lead-in to Christmas.
Mr Albertson says the high New Zealand dollar is making imports cheaper as well, some of which is being passed on to shoppers.
The Kiwi fell more than half a cent against the US currency after the official figures were released. By Thursday night, it was buying a little over US80 cents.