Many Australian families are about to face an unwelcome surprise in their letterbox or email inbox – their latest electricity and gas bills – if my recent experience is anything to go by.
Last night, I finally found the courage to open the email from my energy provider. It didn’t make for pleasant viewing.
Compared to the previous corresponding period, it was a whopper, particularly for gas, and for a small household in a small apartment, I had to question whether it wasn’t for the entire block.
Even for someone who has written extensively about the potential for “bill shock” from the recent energy price increases, it came as a surprise.
Heaven help those who weren’t aware of the increase coming, despite the ongoing political debate on energy policy, particularly families who are heavy energy users.
With household budgets already stretched, it immediately looms as a near-term threat to the outlook for household spending, the largest part of the Australian economy at a shade under 60%, as well as a political threat for Malcolm Turnbull’s government.
But the new bills are not exactly the best of news following two months of back-to-back declines in retail sales.
And while not every household will get a surprise on the scale I experienced — your location and energy provider will determine just how large your increase will be — it’s likely that many will.
According to estimates from the Commonwealth Bank, power prices, as measured in Australia’s consumer price inflation (CPI) basket, are, on average, likely to lift by 15% across the country in the September quarter. Adding credence to this view, it found that spending patterns from its own customer base showed the average power bill jumped by 17.6% compared to the previous quarter, something that may be explained by an increase in both costs and usage during this period.
As Australia’s largest retail bank, it offers a fairly good guide as to what’s been seen across the broader economy, be it for households or businesses.
“Bill shock”, as it’s been coined, has or is about to hit, creating an unwelcome level of uncertainty about its broader impact on the economy.
As Gareth Aird, senior economist at the Commonwealth Bank, rightfully points out, the recent price increases will only act to stretch household budgets even further.
“Energy consumption is non-discretionary and the big rise in power prices is akin to a tax on households,” he says. “Energy usage can be tweaked at the margin, but in general it is something that all households must consume.”
And with many household budget’s already strained by years of weak incomes growth and cost of living pressures, Aird says that means many households will have to divert money away from spending in discretionary areas.
“Over the past eight years households have had to devote a greater share of their wallet to paying energy bills because the rise in power prices has significantly outpaced household income growth,” he says.
“In other words, energy price hikes greater than income reduce the pool of money available to households to spend on other goods and services.
“Ultimately this weighs on consumption growth.”
Aird says that recent weakness in retail sales may be partly as a result of the recent spike in power prices.
Yes, although no one can be entirely sure what has driven the recent weakness, the early indicators suggest that some Australian households may be forgoing life’s little luxuries in order to pay the bills.
They certainly did in 2012 following the introduction of Australia’s now defunct carbon tax when gas and electricity prices spiked.
And, of course, it’s only early October, with many households only just starting to digest these price increases. I know I am.
And while the spike in energy prices will also lead to a lift in inflationary pressures — something Aird says will likely add 0.51 percentage points to headline CPI in the September quarter — rather than helping to bring forward a rate hike from the Reserve Bank of Australia (RBA), it could actually lead to the bank leaving rates on hold for an even greater period.
“We think the second round impact of higher power bills may ultimately prove disinflationary on the rest of the consumer basket as the growth in demand for other goods and services is negatively impacted.”
“From a monetary policy perspective, the RBA will largely look through the step up in headline inflation.”
What Aird is saying is that while higher energy prices will lead to a short-term acceleration in inflationary pressures, the subsequent hit to household budgets risks lowering spending in other areas longer-term, adding to downside risks for prices as demand declines.
If that does play out, it’s unlikely that the RBA would consider hiking interest rates with the household sector already weak as that would merely amplify the risks the risks of an economic slowdown, or worse.
Indeed, if anything, the RBA is probably concerned about the negative side effects brought about by the lift in energy prices.
It’s an unwelcome development, particularly at a time when Australia’s economy is showing plenty of promise, running the risk of derailing the fledgling recovery.
Making it even more infuriating, it’s largely as a result of domestic policy failures rather than events abroad.
Australia is, after all, blessed with commodity riches, including energy wealth. Alas, here we sit discussing huge increases in retail energy prices and the threat they pose to the economy.
Aird nails the argument why this has become such a contentious issue in one simple sentence.
“There are very few winners from a spike in electricity prices and that is why it’s become an issue in the economic and policy debate.”
It’s unlikely that few will disagree.