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Consumer Price Index.



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TREASURER

NO.001

Consumer Price Index ─ December Quarter 2000

Today’s Consumer Price Index (CPI) confirms the benefits of the Government’s economic reforms in achieving continued low inflation outcomes, with intense competitive pressures and some cost savings from the introduction of The New Tax System limiting the extent to which prices have increased.

The All Groups CPI increased by a low 0.3 per cent in the December quarter 2000, significantly lower than the median market expectation of a 0.8 per cent increase. The 5.8 per cent increase in the CPI over the past year largely reflects the one-off impact from the introduction of The New Tax System on 1 July 2000 (estimated at slightly less than 3 per cent) and the temporary effect from higher world oil prices. Looking through both these influences, the CPI is estimated to have increased by around 2 per cent through the year to the December quarter, at the lower end of the medium-term inflation target band.

Prior to the September quarter, CPI increases excluding petrol were averaging around ½ per cent per quarter. With slightly higher petrol prices adding to this in the December quarter, it seems likely that it was the cost savings flowing from The New Tax System and the continued intense competitive pressures that contributed to this very low quarterly outcome.

The increase in world crude oil prices of around 30 per cent in US dollar terms over the past year has increased petrol prices significantly in most countries. In Australia, petrol prices have increased by 25 per cent over the past year, contributing 1 percentage point to the increase in the CPI through the year to the December quarter.

The fall in world oil prices since their peak late last year has already led to some significant falls in the price of petrol in recent weeks. If the gradual downward trend in world oil prices continues, petrol prices are likely to exert a downward influence on the CPI in the March quarter and later. Some elements of The New Tax System may also act to further limit CPI increases in coming quarters, as lower taxes on diesel, the removal of embedded Wholesale Sales Tax and the abolition of Financial Institutions Duty flow through to final retail prices.

Consumers benefitted from a fall in the price of a range of items in the December quarter. For example, milk prices fell by more than 3 per cent; pharmaceuticals prices fell by nearly 4 per cent; furniture and furnishings prices by around 1 per cent; and clothing prices fell slightly.

Looking ahead, the single most important factor for the continuation of low inflation remains moderate wages growth. With the generous income tax cuts and increases in welfare benefits which accompanied the introduction of The New Tax System and the

success of the Government’s recent economic reforms, Australia’s solid economic performance looks set to continue.

CANBERRA 24 January 2001