Cigarette tax sparks inflation jump

Australia’s monthly inflation rate has jumped, with prices rising at the fastest pace since October 2008, spurred in large part by the federal government’s 25 per cent tax slug on cigarettes.

Prices increased by 3.7 per cent in the year to May, up from the 2.9 per cent annual pace in April, according to the TD Securities – Melbourne Institute Monthly Inflation gauge.

”While there is a spike in the headline measure due to the 25 per cent lift in the tobacco excise, excluding this outcome still sees headline inflation breaching the upper limit of the RBA’s two to three per cent inflation target band,” said TD Securities senior strategist Annette Beacher.

The inflation rate jump isn’t likely to alter the Reserve Bank’s interest rate settings. Turmoil in global financial markets this month, centred on Europe’s sovereign debt crisis, has all but eliminated expectations of further rate rise by the central bank over the next year.

Investors were earlier today pricing in a modest chance of a cut – judging it to be a one-in-20 prospect – in official interest rates when the RBA board tomorrow. TD’s Ms Beacher, though, said the latest inflation data effectively eliminates any rate cuts in the near term.

”The markets are clearly overshooting by pricing in a material risk of a rate cut in the coming months,” said Ms Beacher. ”With a fully-employed economy and price pressures clearly building up a head of steam, a rate cut is the last thing this economy needs.”

The central bank has lifted rates six times in eight months – including at the start of this month – to slow the growth in the economy and contain prices pressures expected to be driven by the re-ignited commodities boom. Recent economic data, though, has revealed the fragile confidence of consumers and wavering corporate appetite for investment.

Inflation returns

Stripping out the impact of tobacco tax, the gauge rose by just 0.1 per cent or 3.3 per cent in the twelve months to May, TD Securities said. The government announced the new 25 per cent tax on a pack of cigarettes in April 30, to raise an estimated $5 billion over four years, earmarked for spending on healthcare.

”Whether or not one nets out the effects of taxes on tobacco, the data this month reaffirms the observation made last month that inflation is back,” said La Trobe University economics professor Don Harding.

”In the short run, international considerations will most probably preclude further tightening of monetary policy but it is hard to escape the conclusion that more will need to be done as soon as the international situation clears,” he said.

The monthly inflation gauge rose 0.5 per cent in May – mostly because of the tobacco tax – from 0.4 per cent in April, the seventh straight month of increases.

Also contributing to May’s increase were rises in the cost of fuel and financial services, while the price of fruit and vegetables, travel and recreation all fell. Rent prices rose 0.2 per cent in May, putting them above their level of a year ago, and marking the first annual gain in seven months.

The May TD Securities report suggests the official June quarter consumer price index may rise by 1.35 per cent, from 0.9 per cent in the March quarter. It also tips a 3.8 per cent rise in the year to June, up from a 2.9 per cent increase in the year to March.


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