Cigarette tax increase will add to inflation Almost doubled: Cigarette tax to rise from 36 cents per cigarette to 69 cents by 2017. The federal government will lift Australia's future inflation rates by at least 0.3 per cent a year and probably more, after making smokers pay a third of the bill for the latest blowout in the budget's bottom line. The government had already hit smokers with increased excise duty in the May budget, and has now hit them again with a much bigger tax rise, lifting the cigarette tax by 12.5 per cent for the next four years, on top of the average increase of 4.7 per cent a year imposed in May. The two series of tax hikes combined will almost double the cigarette tax from 36 cents a cigarette now to 69 cents by 2017. But the double hit has serious implications for inflation. In itself it will initially add 0.3 per cent a year to the consumer price index, but that will rise rapidly over time. By 2017, the excise duty alone could make up 2.5 per cent of the CPI base, and lift inflation by almost 0.5 per cent a year. Even in the past four years, rising cigarette prices have lifted the inflation rate by 0.3 per cent a year. They were responsible for more than 10 per cent of Australia's inflation, largely due to tax rises. The Reserve Bank aims to keep underlying inflation between 2 and 3 per cent. While the impact of the tax rises on underlying inflation cannot be forecast, they will clearly make it harder for the bank to keep inflation within its target range. Unless the bank excludes cigarettes from its measure of underlying inflation, the tax hikes carries the risk that future interest rates will have to be higher than they would otherwise have been, just to keep inflation within the target. With a 2010 survey estimating that three million Australians are smokers, the decision to double their tax also carries big political risks in a tight election. Announcing the latest rise, Treasurer Chris Bowen and Health Minister Tanya Plibersek said it would serve several purposes. "It will provide funds for cancer and stroke related health services, it will deter young people from taking up smoking, and it will help return the budget to surplus," they said. Their forecasts assume that cigarette consumption will fall about 7 per cent a year ahead, a change from an average decline of 1.7 per cent a year this century.