NO.100

Today’s Consumer Price Index shows the All Groups Consumer Price Index (CPI)

increased by 3.7 per cent in the September quarter 2000 to be 6.1 per cent

higher than a year ago. Of this, a little less than 3 per cent appears to be the one-off

impact of The New Tax System, significantly lower than the 3- per cent

estimated in the Budget. Excluding The New Tax System effect, the CPI increased by

around 3 per cent over the past year, of which around 1 per cent reflects higher petrol

prices.

Intense competition in the Australian economy, and effective monitoring by the ACCC,

are likely to have resulted in some of the tax increases being absorbed by sellers, and

cost savings flowing from the tax changes may have been passed into final retail prices

more quickly than anticipated.

In the September quarter the ABS introduced the 14^th series CPI, which more

accurately reflects current household consumption patterns. This is likely to have

slightly reduced the overall impact of The New Tax System on consumer prices. For

example, the 14^th series places a higher weight than previously on items such

as motor vehicles, which declined in price under the new tax arrangements, and a lower

weight than previously on items such as cigarettes.

World oil prices have increased by around 50 per cent in US dollar terms over the past

year, leading to sharply higher petrol prices in most countries. In Australia, petrol

prices increased by 10.4 per cent in the September quarter to be 24 per cent higher

than a year ago. The petrol price increase contributed 0.4 per cent to the

increase in the CPI in the September quarter.

With recent quarterly increases in the CPI (less petrol) averaging around per cent,

it seems likely that the remaining increase of a little less than 3 per cent in the CPI in

the September quarter largely reflects the impact of The New Tax System.

The overall increase in the CPI in the September quarter was below the Budget forecast

of around 4 per cent, reflecting what appears to be a lower than expected

impact from the introduction of The New Tax System being partly offset by higher

than expected petrol prices.

As noted in the Budget papers, following the one-off increase in the CPI in the

September quarter due to The New Tax System, CPI increases in subsequent quarters

are likely to be much lower, with inflation returning quickly to rates consistent with the

inflation target band. Updated forecasts will be released in the Mid-Year Economic and

Fiscal Outlook.

Households benefited from a fall in prices for a range of items, at least partly in

response to the tax changes. For example, the price of motor vehicles fell by 2.5 per cent

in the September quarter, to be 3.6 per cent lower than a year ago. The price of

audio, visual and computing equipment fell 5 per cent in the quarter and 14.3 per

cent through the year. The price of basic food, which is GST free, fell in the quarter.

The First Home Owners Scheme also moderated the impact of the changed indirect tax

arrangements on house purchase prices in the September quarter. The net cost to consumers

of child care fell 15 per cent in the quarter reflecting the beneficial impact of the

assistance to families under The New Tax System.

In the medium-term, the most important determinants of inflation are the rate of

increase in labour costs and productivity improvements. The success of the

Government’s recent labour market reforms in achieving moderate wage outcomes and

solid productivity gains have played a major role in ensuring that ongoing inflationary

pressures remain in check.

As the increase in the CPI from The New Tax System in the September quarter

appears to have been below the Budget forecasts, households have been generously

compensated for these price increases through the income tax cuts and increases in

pensions and other welfare payments from 1 July.

More broadly, the Australian economy continues to perform remarkably well, reflecting a

judicious mix of economic policies and a dynamic and flexible economy. The success of the

Government’s economic reforms will assist in maintaining Australia’s impressive

economic performance over the period ahead.

CANBERRA

25 October 2000