Thursday, October 25, 2012

Price Shock: The carbon tax is doing even less than expected

Me on ABC NightLife,Wednesday October 24 2012

8 minutes, play or RIGHT CLICK to download mp3

The carbon tax has boosted the cost of living scarcely at all. Despite dire talk of an “almost unimaginable” increase (Tony Abbott) and $100 for a Sunday roast (Barnaby Joyce) the first official consumer price figures show a far lower impact than predicted by the Treasury.

Last July Treasury said the tax would push up the consumer price index 0.70 percentage points, adding $9.90 per week to average household costs. In return households were given compensation averaging $10.10 per week.

But 0.70 percentage points looks like being an overestimate. Inflation figures for the September quarter (the one that encompasses almost all of the electricity and gas price rises) show them adding 0.44 points to the CPI. It’s a big figure - but not that much bigger than the usual September quarter slug.

Sydney households were whacked with with a horrific 17.9 per cent increase in the price of electricity in the latest September quarter. As bad as it is, it’s not that much worse than the 15.1 per cent served up the previous September quarter, and its much less than the 21.7 per cent served up the September quarter before that.

Melbourne households have endured a 13.6 per cent increase electricity prices - unwelcome, but well short of previous September quarter jumps of 19 and 21 per cent. Canberra families have had to cop 19 per cent this year - bad, but not too different from a previous 18.1 per cent.

Nationwide, electricity and gas price rises added 0.25 and 0.33 points to the consumer price index in the previous two September quarters. The latest increase of 0.44 points isn’t that much bigger. It is 0.11 points bigger than last year’s increase and 0.19 points bigger than the one before that. Those differences are a long way short of the 0.70 impact forecast in the lead up to the introduction of the tax...

We won’t know the full impact for some time. Treasury expected the gas and electricity price hikes to account for only half of the 0.70 boost, the rest being accounted for by businesses that passed them on.

But Commonwealth Bank senior economist Michael Blythe makes the point that if the electricity and gas impact is around half what was expected it is likely the total impact will be too.

“It is looking as if the Treasury’s figure will be an overestimate rather than an underestimate,” he told the Herald.

The total consumer price index increased 2 per cent in the year to September, a figure right at the bottom of the Reserve Bank’s two to three per cent target band, giving its board room to cut interest rates again at its next meeting on Melbourne Cup Tuesday.

The quarterly price increase of 1.4 per cent is high, on a par with earlier outsized increases sparked by unusual movements in fruit and vegetable prices. The latest increase also reflects an outsized jump in food prices which contributed 0.32 points to the total, not too far behind the 0.33 points contributed by electricity and the 0.11 points contributed by gas.

The so-called underlying rates of inflation calculated by the Bureau of Statistics come in at 2.4 and 2.6 per cent, almost exactly in the middle of the Reserve Bank’s target band.

Futures markets were last night pricing in a 60 per cent chance of a rate cut at the Melbourne Cup day meeting, down from 85 per cent on Tuesday.

In today's Canberra Times, Sydney Morning Herald and Age

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