Today's Consumer Price Index (CPI) outcome shows why combating inflation remains a key economic challenge confronting the Rudd Government.
The CPI figure illustrates the magnitude of the inflation challenge we face, rising by a strong 0.9 per cent in the December quarter to be 3.0 per cent higher through the year. Headline inflation is now at the top of the Reserve Bank's medium-term target band of 2 to 3 per cent.
The average of the RBA's underlying measures of inflation accelerated rapidly in the quarter, up 1.1 per cent to be 3.6 per cent higher through the year. The seriousness of the situation is reflected in the fact the average of the underlying inflation measures are at a level not seen in 16 years.
Automotive fuel and housing costs grew strongly in the December quarter. Automotive fuel prices rose by 7.3 per cent in the quarter due to strong growth in world oil prices. Low vacancy rates and strong demand for housing continue to drive rents higher across all capital cities. Rents increased by 1.6 per cent in the quarter to be 6.4 per cent higher through the year, the fastest annual growth since the early 1990s. House purchase prices also rose strongly in the December quarter due to solid growth in material and labour costs.
The majority of food items experienced price increases in the December quarter. However, fruit and vegetable prices fell sharply in the quarter, with the strong price rises witnessed in previous quarters being partially unwound. Price falls were recorded for motor vehicles along with ongoing falls in audio, visual and computing equipment prices.
Underlying inflationary pressures will see headline inflation remain elevated in the period ahead. Tight labour market conditions, including skills shortages, are leading to inflationary pressures as firms compete for increasingly scarce labour. High energy prices are also adding to price pressures in a capacity constrained economy.
The Rudd Government's five-point plan to win the war on inflation is focused on a new era of fiscal restraint and expanding the long-term productive capacity of the economy by addressing the twin investment deficits in infrastructure and skills. The Government's plan will, over time, help ease inflationary pressures and deliver prosperity for families into the future.