NO.077

Today’s Consumer Price Index shows the All Groups CPI increased by

0.8 per cent in the June quarter 2000 to be 3.2 per cent higher than a year ago,

largely reflecting rising petrol prices. The outcome is in line with budget forecasts.

World oil prices have increased by more than 60 per cent in US dollar terms over the

year to the June quarter, leading to a sharp rise in petrol prices in most countries. In

Australia, the increase in petrol prices was around 22 per cent over the past year.

Leaving aside petrol prices, the CPI rose by 2.4 per cent over the past year, well within

the Reserve Bank’s medium-term inflation target band. World crude oil prices have

stabilised or declined a little over recent weeks. If this trend continues, petrol prices

are likely to have a moderating influence on the CPI over the period ahead.

The prices of several items are likely to have been affected to some extent over recent

quarters ahead of the introduction of The New Tax System. For example, house

purchase prices have risen in response to very strong activity in the housing sector ahead

of the tax changes, some insurance prices (as measured in the CPI) have included a GST

component, while motor vehicle prices and some audio, visual and computing equipment

prices have fallen.

Despite the modest overall increase in consumer prices in the June quarter, households

benefited from a fall in the price of a range of items. The cost of utilities fell 0.4 per

cent in the June quarter. Fresh fruit prices fell by 4 per cent in the June quarter

to be 17 per cent lower than a year ago. The price of electronic equipment fell

1.2 per cent in the quarter and 15 per cent through the year. Domestic holiday travel and

accommodation prices fell by 4.3 per cent in the June quarter.

Looking ahead, ongoing inflation is expected to remain low, in line with the

medium-term target band of 2–3 per cent, underpinned by moderate wage outcomes and

solid productivity gains. Much of the effect on prices of the changed indirect tax

arrangements under The New Tax System will be recorded in the September quarter.

However, these price effects will be once-off and will not disturb the low trend inflation

rate in Australia. Households have already been generously compensated for these once-off

price increases through income tax cuts and increases in pensions and other welfare

payments from 1 July.

The introduction of The New Tax System has proceeded smoothly. Inflationary

expectations fell significantly following the introduction of the GST and consumer

sentiment improved dramatically. The success of the Government’s economic reforms

will continue to support Australia’s impressive economic performance over the period

ahead.

CANBERRA

26 July 2000