- We assess the impact of surging utility bills on inflation, household spending and the policy response.
- Rising utility charges have been a key contributor to consumer price inflation in Australia in recent years and this provides an interesting policy dilemma for the Reserve Bank of Australia (RBA). On the one hand, rising inflation adds to the case for monetary policy tightening. But, given that these price rises are the result of rising government charges, rather than a reflection of stronger demand, means that it could be harder to justify raising interest rates in this instance.
- Indeed, the mostly non-discretionary use of energy, gas and water implies that rising prices for these goods provides a contractionary force on discretionary consumer spending – which is potentially more significant than the impact of a one-off increase in interest rates.
- The chart opposite shows that utility bills increased by more than 15% in the year to June 2010; the sharpest annual increase in this component of the consumer price index (CPI) since 1983. Moreover, prices were pushed higher again for the 2010-11 financial year. From 1 July 2010 it is estimated that average utility prices in Australia were increased by around 11%. The largest price increases were 10% in NSW, 13% in Vic and Qld, and 18% in WA.
- Given that this is a cost faced by all households, price increases of this magnitude are likely to have a marked effect on consumer behaviour. To highlight this, compare the impact of this change to a 25bps increase in the standard variable mortgage rate.
- In the 12 months to June 2010, the average household utility bill was around $2,700. Ignoring changes in the level of usage, an 11% increase in the price of gas, electricity and water will leave households $300 worse off over the 2010-11 financial year. At the same time, there have also been reports of council rates rising by as much as 10% in some areas of NSW and Victoria, which could add a further $200 to the annual bill.
- This compares to a 25bps increase in the standard variable mortgage rate, which would result in a $700 per annum increase in the average mortgage repayment (assuming an average owner occupier mortgage of $280,000). Now, while this is a larger increase in fees, it is only applicable to the ~35% of households that actually have a mortgage.
- As a result, the aggregate impact on household balance sheets and consumer behaviour from the rise in utility prices will be larger than that from a rise in mortgage rates. Moreover, a similar argument could be constructed for other areas of non-discretionary consumer spending, such as rents, health and education, all of which have recorded consistently stronger price increases over recent years.