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December 2008 Consumer Price Index.

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Today's CPI result provides further evidence of the impact of the global recession and falling commodity prices on the Australian economy.

The CPI fell by 0.3 per cent in the December quarter to be 3.7 per cent higher through the year, slowing from 5.0 per cent in the September quarter. Underlying inflation was 0.7 per cent in the quarter and 4.3 per cent through the year.

The fall in the December quarter CPI was mainly driven by a sharp reduction in the price of automotive fuels, which followed the substantial fall in world oil prices in the latter part of 2008. However, the moderation in underlying inflation compared to recent quarters also suggests that inflation pressures are easing more broadly.

While the annual inflation rate remains high, this reflects inflationary pressures from earlier in 2008. Inflation is expected to continue to ease over the next six to twelve months, as the full effect of weaker world economic conditions flows through.

Automotive fuel prices decreased by 18.2 per cent in the December quarter, following a 2.0 per cent fall in the September quarter, detracting around 0.9 of a percentage point from inflation in the December quarter. The price of motor vehicles also fell in the quarter by 2.4 per cent.

Financial and insurance services fell by 0.3 per cent in the December quarter, associated with a fall in margins on home loans.

Partially offsetting these falls were rises in house prices and food prices. Housing costs increased by 0.7 per cent in the quarter, with rents continuing to rise strongly, while food prices rose by 2.0 per cent in the quarter, mainly due to price rises for fruit and bread.

Today's figures show that inflation in Australia is subsiding, as it is in most of the world, in response to a rapid slowdown in the global economy.

The Government has taken decisive action to support growth and jobs, and will continue to invest in the long-term fundamentals so Australia can have strong growth with low inflation well beyond the current global crisis.

CANBERRA 28 January 2009