Electricity price spike arcs up CPI

By Leith van Onselen

As summarised earlier by Houses and Holes, the Australian Bureau of Statistics (ABS) this morning released the Consumer Price Index (CPI) data for the September quarter 0f 2012, which showed an increase in inflationary pressures across the Australian economy:

According to the ABS, headline CPI rose by 1.4% in the September quarter, which follows the June’s 0.5% rise. You can see from the below chart that inflationary pressures have begun to build after falling since mid-2011:

On an annual basis, headline CPI has risen to 2.0% from nly 1.2% the June quarter, which is still below the Reserve Bank of Australia’s (RBA) target of 2% to 3% growth over the medium term, but obviously rising:

Looking at the core components, price rises in the September quarter were recorded everywhere except transport, where price falls were recorded. Of particular note, electicity and utilities prices – both of which are sub-groups of housing – surged 15.3% and 12.2% respectively over the quarter, following introduction of the carbon tax. In turn these sub-components helped to push-up overall housing inflation by 3.2% over the quarter:

Finally, the ABS includes an ‘analytical series’, which provides alternative measures of underlying inflation in the economy. These measures – namely the trimmed mean and weighted median – aim not to measure the size of inflation (which is captured by the headline figure), but the breadth of price inflation across the basket of consumer goods and services.

The purpose of these measures is to exclude unusually large price movements (in both directions) of just a few of the subgroups, which may have quite an impact on the headline CPI. By excluding these outliers, you can get a feel for how widespread across the consumer basket inflation really is (see here for further details).

According to the RBA, the trimmed mean and weighted median measures rose by less than the headline figure, growing by only 0.7%/0.8% (trimmed mean / weighted median) in the September quarter and by 2.4%/2.6% (trimmed mean / weighted median) over the year – in the middle of the RBA’s inflation target (see below charts).

In summary, inflationary pressures appear to be returning in some parts of the Australian economy, complicating the argument for further rate cuts.

The RBA has said it will extrapolate from carbon price rises so I do not think this will prevent another cut in November or December. The trimmed and weighted median should both strip out the volatile items and both are still in the middle of the RBA’s comfort range.  However, if prices don’t ease swiftly the RBA will be caught in a bind, with its desire to stimulate housing construction via rate cuts possibly at odds with the need to keep a lid on prices via maintaining the cash rate at current levels.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

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Comments

  1. My electricity bill is through the roof and I blame the installation of that stupid “smart meter” (as well as the carbon tax). I tried to hold them off for as long as possible but they came around a few months ago and put it in anyway… It doesn’t matter who you buy your power from, they are all the same.

    I’m sick of being told lies about how competition is supposed to be good for me. Bring back the State Electricity Commission!

    • Sean I’ve got to say my electricity bill ‘sparked’ my interest. $276 for the quarter. I’m only home 3 days per week. No air conditioners. I did run a heater a bit at times through the winter. I live on my own. How the hell are families coping with this baloney!

      Re SEC…maybe…”nostalgia is not what it used to be!” (Yogi Bera) I’d imagine the heads of such an organisation would want to keep their millions of dollars per year salary package these days!

          • Wasted OpportunitiesMEMBER

            I am going to get up on my smug-horse for a second. I barely noticed the carbon tax impact on our recent bill. Our bill ranges from $200 to $270 a quarter for 2 people in a large 2 br apartment, with electric water heating and cooking (although we use a gas WeberQ to cook meat a few times a week).

            We keep an eye on power consumption but I wouldn’t say we’re stingy about it. It seems like most households could save a lot of money by some pretty basic shifts in habits.

          • Ditto to WO on most of those observations including the bill size and the WeberQ (great little device: tip – get the lid light accessory)

          • Dishwasher? Washing machine?

            I would guess that despite you thinking that you use a standard amount of energy you’re probably consuming far below average – I’d guess around 4000 kWh per year.

      • Sean I’ve got to say my electricity bill ‘sparked’ my interest. $276 for the quarter. I’m only home 3 days per week. No air conditioners. I did run a heater a bit at times through the winter. I live on my own. How the hell are families coping with this baloney!

        How much of that is consumption and how much is fixed cost, though ?

  2. darklydrawlMEMBER

    “The RBA has said it will extrapolate from carbon price rises… The trimmed and weighted median should both strip out the volatile items.”

    I understand why they do this (well the 2nd bit at least), but it still seems like they are fudging the numbers to fit the desired outcome.

    Mind you this is nothing new…

    • Is there anything cheaper here? Serious question. I’ve lived in about 5 countries, including UK and USA, and this place takes the cake in terms of high prices. 🙄

      • Is there anything cheaper here? Serious question. I’ve lived in about 5 countries, including UK and USA, and this place takes the cake in terms of high prices.

        When I moved to Zurich in 2007 it was definitely more expensive there than Sydney (I asked for a 20% salary increase to cover cost of living differences).

        By the time I came back in 2011 (after being sidetracked in the US for a couple of years, which just exacerbated the effect), even Brisbane was close to Switzerland in cost of living.

        From memory of my trips back to Oz in the interim, the first time I came home and thought “shit this place has gotten expensive” was 2009.

        • They’re not cheap. Just ask any developer – those brown paper bags need to get bigger all the time!

      • That is a classic. But what i’m finding more and more of is that the distributors are putting parallel import restrictions on their global distribution networks as well.

        This lets them continue to shaft Australia while we have to just sit back and suck up the 50-100% mark-up on US or EU prices. So far it has been possible to find small retailers in the US or EU that don’t give a sh8t but it’s getting harder – and more frustrating.

        Add to this the ridiculous cost of electricity and utilities and land/housing in Aus. Australia really is the Switzerland of Asia.

    • SCM: biggest contributor

      HOUSING GROUP (+3.2%)

      “The housing group rose in the September quarter 2012. The main contributors to the rise were electricity (+15.3%), gas and other household fuels (+14.2%), property rates and charges (+5.8%) and new dwelling purchase by owner-occupiers (+0.9%)….The ABS will not be able to quantify the impact of carbon pricing, compensation or other government incentives and will not be producing estimates of price change exclusive of the carbon price or measuring the impact of the carbon price.

      Over the twelve months to the September quarter 2012, the housing group rose 4.7%. The main contributors were electricity (+18.5%), rents (+4.0%), gas and other household fuels (+18.9%) and new dwelling purchase by owner-occupiers (+1.2%).”

      http://abs.gov.au/ausstats/[email protected]/Latestproducts/6401.0Main%20Features4Sep%202012?opendocument&tabname=Summary&prodno=6401.0&issue=Sep%202012&num=&view=

      Some fine Treasury modelling:

      “15.3 percent increase in electricity prices? In one quarter? What did Treasury modelling say about that? Oh, yes:”

      ‘The carbon price leads to an average increase in household electricity prices of 10 per cent over the first five years of the scheme.’

      And why is the ABS not to quantify the impact of the carbon tax?

      • In NSW, IPART granted an 18% increase in electricity prices, 9% of which was due to the carbon tax. That’s a one off increase. Given the carbon price is fixed for the next three years, and looks like it will decrease after that given our ties to Europe, I’d say 10% over 5 years isn’t the scam you make it out to be.

  3. A pretty volitile index anyway – we’ve seen four seperate bouts of zero or negative CPI readings over the past decade, even though it was one defined by an ongoing boom in credit growth and consumer spending.

    But a rise in electricity is like a sustained rise in petroleum costs – it ends up running through everything.

    My solar system is still giving me credits at the moment, let’s see if I start getting bills (of course with summer coming, I’ll end up consuming more electricity by running the aircon).

  4. “I do not think this will prevent another cut in November or December.”

    Exactly right UE. The RBA isn’t concerned about inflation at this time because it helps to articially deflate the real level of private debt and real house prices.

    Inflation also helps reduce the attractiveness of the $AU and persistently high inflation (3-4%), in combination with low interest rates (2-3%)will help the $AU fall below parity with the $US.

    We’ll definetely get another 25bps reduction in official rates in either November or December.

    As for the ability of rate cuts to stimulate housing construction, it won’t work. What we need is more skilled migration.

    Crowd out incumbents with new cashed up migrants and demand for new property / construction activity will skyrocket.

  5. Those quarterly and annual change charts still appear to be trending down to me. I’m surprised you have declared a return of inflationary pressures. And in doin so, understating the possibility of this print being nothing more than a carbon tax induced spike.

    There is so much fat in prices Down Under that I wouldn’t be at all surprised to continued disinflation from tepid demand.

    *Ducks for cover in anticipation of the forthcoming rebuttal from flawse…*

    • 🙂 As long as you are cringing in fear!

      Seriously I don’t care much whether I am right or wrong. It’s the future. It will be what it will be. As Yogi Bera said “It’s difficult to make predictions….. especially about the future”

      However I think it is VERY important to be aware of the forces that are likely to come to bear one form and another. I think it is also important that we understand what is REALLY happening so that we are not making a bad situation worse. As such this piece I posted on the other CPI thread is relevant.

      “Bernard Hickey argues the RBNZ should target non-tradable inflation to deal with a structural flaw that tilts our economy away from exporters”
      http://www.interest.co.nz/opinion/55400/opinion-bernard-hickey-argues-rbnz-should-target-non-tradable-inflation-deal-structura

      I DO see the prospect of even more negative RAT rates as further stealing from those who have saved and from our own children just so we can continue to live this over-indulgent, self-entitled, lazy unrealistic lifestyle that we have adopted.

      Just one important factor…I’m not talking about inflation this month or next quarter or even a year away. I’m talking about a long term (50 year)structural change in the way our world works. So you MIGHT get temporary restraint of inflation as more companies go to the wall. However that is a relatively short term phenomenon that only results in even worse inflationary pressures later. We will need decades to adapt to the new environment. So far, not only have we not started to adapt, we are steadfastly refusing to recognise our reality.

      As I’ve posted, re inflation, we’re just stacking kindling around the house with an obvious fire on the horizon.
      Maybe IF a stable or lower dollar starts accelerate inflation you might think ‘now that silly old ba….rd Flawse was talking something about that’. ‘ Maybe we better pour some water on this damned fire before it burns us all!’
      If you young blokes have all the answers well and good! It just doesn’t look like it at the moment. Those promoting that sort of theory have been 100% wrong so far.

      Current thinking is, as has been posted here, higher inflation, lower interest rates and everything is Hunky Dory! This much I will promise you. In my youth, being a sheep cockie, I used to think ‘the road to hell was paved with sheep’ (from an old amusing poem)
      I can tell you with absolute certainty that the road to hell is the idea that inflation is good.
      Inflation does NOT result in less debt!!! Never in my lifetime! In fact that’s exactly how we come to be in this debt wallow!

    • Over the next few years we are going to get a lot of this looking through inflation.
      ‘Mr Walters said the RBA would look through the initial spike in prices when it next contemplated whether to change the cash rate’

  6. We know the longer term inflation trend is down in Australia, as can be seen here in an RBA figure:

    http://www.rba.gov.au/monetary-policy/images/inflation-long-run-small.gif

    So, despite food and housing costs being costly in this quarter, the bigger picture question is what is the future of the prices of all goods and services?

    Using Japan as the analogy, note the disinflation and outright deflation experienced in the period 1986-2009 below. They appeared to have experienced outright deflation at about the 4 year mark post the real estate and stock market bubble implosion.

    http://www.itulip.com/images/japanflations1986-2008.gif

    Given Australian housing is following the same slow melt in housing, it will be interesting to see if this pattern appears; with the current low inflationary environment increasing the risk of outright deflation based on the economic history of depressions/recessions.

    • There is no similarity between Japan and Australia. The cutltures are different, the economic structure is totally different. How the heck do you expect the same outcome?

  7. It’s interesting to see people complaining about electricity prices although electricity prices are still low in historical terms.
    Price of electricity used to be above $0.30 (2012 dollars) in 50s and 60s. In early 80s, price was just slightly lower than now (around $0.20 in today’s dollars).
    On the other hand there is no much talk about petrol although it used to be 60c in 1999 = 6kWh) and it’s $1.5 = 7kWh.

    Or house prices – an average house in Sydney in 1996 was priced $220k = 2.3m kWh. House today is $630k = 2.6m kWh.

    So, people are not interested in actual price of something, but rather in rate of change of price change or their perception of it.

    • Thanks for the numbers raves.
      ‘people are not interested in actual price of something, but rather in rate of change of price change or their perception of it.’

      You were comparing to 1996 so few have even a perception left of that time if they were conscious and paying electricity bills then. We are observing what is happening in recent times.

      Of course, in the meantime, Gerry Harvey et al have got very wealthy selling us Air Conditioners and high energy use appliances. We live on computers instead of fresh air!
      It would be interesting to see av electricity consumption in 1996 compared to now if you have it handy?

      • total consumption per capita increased almost 200% from 3500 kWh/year in 1971 to almost 10000 kWh/year today. But what is more interesting is that consumption per residence (household) didn’t increase that much – “only” 50% from 4500 kWh/year in 1971 to less than 7000 kWh/year today. Reason for this is decrease in household size.

        In 1996, consumption per capita was 7900 kWh/year. It is interesting that consumption per residence increased just a bit from 6700 kWh/year although household size remained stable.

        Something unrelated: there were 2,909,347 residential electricity customers in NSW in June 2011. Census claims there were only 2,864,531 residences (dwellings) in June 2011.

        • raveswei, do those consumption figures include industrial/commercial consumption, or are they domestic only? If the former, the large increase per capita is more understandable.

          • Yes, this includes industrial/commercial consumption.

            Total consumption increased 40% since 1996.

            That staggering number gives clear picture why electricity price increased so much.

      • Jumping jack flash

        I remember electricity bills in 1996 being about $80 – 150 a quarter. 3 young guys living in a share house for uni with lights regularly left on and all-nighters – studying/partying common. All computer science undergrads so each of us had some ridiculously powerful computer sucking down the power 24/7.

        Electricity now? Generally $600 a quarter, sometimes higher, and frugal living with a family of 4. Kids in bed by 8.30. Wife and I in bed by 10/11. I scour the house to make sure everything is off.

        My next bill comes through on the 8th, and I’ve had a smart meter installed recently – I don’t know what that means exactly.

        Electricity and other essentials are being relentlessly gouged because they can be. My opinion is they are being gouged because someone wants to pay off their debt.