Brian Fallow

The Economics Editor of the NZ Herald

Power drives inflation rate

Rise of 5.2 per cent in electricity prices largely blamed on cost of transmission and distribution.

Transmission costs have climbed, reflecting Transpower's programme of upgrades. Photo / Christine Cornege
Transmission costs have climbed, reflecting Transpower's programme of upgrades. Photo / Christine Cornege

Electricity prices were a conspicuous exception to the subdued inflation numbers reported yesterday.

As measured for the consumers price index, electricity prices rose 5.2 per cent in the year to March 2013, nearly six times as fast as the overall CPI, which rose 0.9 per cent.

Yet Electricity Authority chief executive Carl Hansen, briefing the media yesterday on the market's performance last year, could point to evidence the spot and futures markets had performed well, and that various measures of the health of competition had improved markedly over the past four years.

He said about two-thirds of the increase in residential consumers' power bills, some 3.3 percentage points, reflected the cost of getting the energy to them - transmission and distribution line charges, which are regulated - rather than the energy itself.

Transmission costs in particular have climbed, reflecting Transpower's multibillion-dollar programme of upgrades to the national grid.

Labour leader David Shearer and Greens co-leader Russel Norman are to hold a press conference today to "unveil policies to bring down power prices and give Kiwi households some relief".

Electricity makes up just under 4 per cent of the CPI, reflecting its share of household spending in aggregate, and it has been a serial offender in terms of consumer price inflation for years.

Hansen pointed to some major drivers of higher retail power prices.

The switch to an electricity market in the late 1990s triggered a rebalancing which ended the previous cross-subsidy from commercial to residential consumers.

The recalculation of the Maui gas field's remaining reserves in 2003 saw gas prices nearly double.

Households tend to consume power at periods of peak demand when wholesale prices are determined by thermal generators, which increases what it costs electricity retailers to serve those customers.

The CPI rose 0.4 per cent in the March quarter, leaving the annual inflation rate steady at 0.9 per cent - the third successive quarter in which it has been below the bottom of the Reserve Bank's target range.

Three-quarters of the quarter's increase can be explained by one item - the annual increase of 11 per cent in the tax on tobacco.

Tradeables inflation, which reflects those items in the CPI whose prices are influenced by world prices and the exchange rate, was minus 0.5 per cent for the quarter and minus 1.1 per cent for the year, while non-tradeables inflation came in at 1.1 per cent and 2.4 per cent respectively.

Contributing to annual non-tradeables inflation were not only electricity but local body rates, up 4.3 per cent, and construction costs, up 3.3 per cent nationwide and 12 per cent in Canterbury.

Deutsche Bank chief economist Darren Gibbs expects the CPI to rise just 0.1 per cent in the June quarter, which would lower annual inflation further to 0.6 per cent.

"Thereafter, whilst disinflationary pressure in the tradeables sector is likely to continue in the foreseeable future given the recent strength of the exchange rate, that pressure should gradually subside, provided that the exchange rate does not continue to appreciate substantially from current levels," Gibbs said.

"Domestic inflation pressures might also be expected to rise gradually provided the economic recovery begins to generate a modest tightening of the labour market over the coming year, as we expect.

"Even so, we expect that it is likely to be well into 2014 before the economy is generating sufficient sustained upward pressure on prices to drive annual inflation towards even the mid-point [2 per cent] of the Reserve Bank's inflation target range."

- NZ Herald

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