Hickey on power prices and rates

Bernard Hickey writes:

Local governments and electricity companies are to blame for New Zealand’s inflation rate being much higher than it should have been for the past 10 years.

They have raised their prices between 5 and 8 per cent each year for the past decade, despite being semi-regulated and mostly publicly owned.

Let’s have a look at annual electricity inflation in the CPI:

• 2004: 8.8%
• 2005: 4.1%
• 2006: 7.1%
• 2007: 6.5%
• 2008: 7.7%
• 2009: 2.1%
• 2010: 5.8% (2.2% is a GST increase compensated by tax cuts)
• 2011: 2.4%
• 2012: 5.2%
• 2013: 3.0%

Now let us look at rates.

• 2004: 3.9%
• 2005: 7.5%
• 2006: 7.4%
• 2007: 6.7%
• 2008: 5.7%
• 2009: 5.9%
• 2010: 6.9% (2.2% is a GST increase compensated by tax cuts)
• 2011: 4.6%
• 2012: 4.3%
• 2013: 4.1%

So I agree with Bernard both have been big contributors to inflation, and both are too high. I would note that they both seem lower in the last five years than the previous five years.

Electricity inflation averaged 5.4% from 2004 to 2008 and 3.3% (excludes GST change) from 2009 to 2013. Rates inflation averaged 6.2% from 2004 to 2008 and 4.7% (excludes GST change) from 2009 to 2013. 

Although the rates have trended down since 2004, they are still much higher than the Reserve Bank’s 1 to 3 per cent inflation target. And that persistent inflation has acted like a type of plaque in the arteries of the economy, putting up its blood pressure of inflation, interest rates and the exchange rate.

Without that persistent inflation at two and three times the rate in the rest of the economy, New Zealand’s interest rates and currency would have been significantly lower.

I’ve always wondered why Reserve Bank Governors Graeme Wheeler and Alan Bollard haven’t convened a conference of mayors and CEOs of councils, electricity generator-retailers and lines companies to read them the riot act.

Not a bad idea. But how much do they contribute?

Electricity is 3.9% of the CPI and rates 2.7% so they make up 7.6% of total costs.  On average they have been responsible for the inflation rate being 0.3% higher per year than it would have been if there were no price increases. A better comparison might be the impact if they had been at the target 2%. Their contribution then is an extra 0.2% a year – which is not insignificant in a tight range the Governor must target.