Govt Rejoicing Over Cheaper Electricity

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Thursday, October 23rd, 2014
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The Abbott government is beating its chest and claiming credit for the biggest drop in electricity prices in at least three decades.

But if Australians are still worried about cost-of-living pressures, they won’t be about to join ministers and start punching the air.

This week’s official inflation figures were the first since the government scrapped the carbon tax, which resulted in a 5.1 per cent drop in electricity prices in the September quarter.

Finance Minister Mathias Cormann proclaimed it was the single largest quarterly fall in electricity prices since electronic records at the Australian Bureau of Statistics began in September 1980.

Environment Minister Greg Hunt went further, saying the record probably stretched back to the Second World War.

“Maybe stretches back further,” he bragged in parliament.

However, when the previous Labor government introduced carbon pricing in July 2012, electricity prices soared more than 15 per cent in the September quarter, although energy providers also blamed infrastructure investment for the rise.

Even so, the latest figures helped drag the annual rate of inflation down to 2.3 per cent, having touched the top end of the Reserve Bank’s 2-3 per cent target band three months earlier.

This was despite a 1.2 per cent rise in food prices – the strongest rise among all groups – led by a 14.7 per cent jump in fruit prices.

Little wonder that nearly three quarters of Australians still believe cost-of-living pressures have worsened in the past year.

Oddly enough, the weekly Essential Research online survey also found two out of three of respondents believed electricity had become more costly during the same time frame.

They also felt unemployment and job security was bleaker, and fewer than one in five thought the overall economy had improved during the past 12 months.

One thing seems clear: the Reserve Bank won’t lift interest rates any time soon.

The minutes of its October board meeting, released this week and before the latest consumer price index instalment, trod a well-worn path.

That is, the board believes the stance of monetary policy is appropriate to foster sustainable economic growth and inflation outcomes consistent with its target.

A period of stability in interest rates was also considered the prudent course of action.

That period already stretches from August 2013.

Su-Lin Ong, the head of strategy at RBC Capital Markets, says the inflation outlook gives the RBA scope to cut rates should economic activity and the labour market weaken substantially.

However, she believes “the hurdle remains high” for such a move, especially given the strength in a suite of housing-related indicators.

Macquarie Research economist James McIntyre expects the cash rate will remain at 2.5 per cent until early 2016, although notes that in the past month the risks to rates have accumulated to the downside.

He is concerned fiscal policy could become a bigger drag on economic growth as the government takes action to combat weaker revenue from falling iron ore prices and slower wages growth, along with the additional costs of military expenditure.

A further tightening of the budgetary purse strings and subsequent confidence impacts on businesses and consumers will pose a challenge to the RBA’s already weak domestic demand outlook, he says.

Treasurer Joe Hockey will hand down his midyear budget view in mid-December.

Right now, it’s difficult to see him handing out any Christmas presents.

 

By Colin Brinsden
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