Power price hikes continue to push up costs

Electricity prices continue to push up costs.

The latest price inflation figures, out today, show the lowest headline inflation rate since 1999.

The consumer price index (CPI) for the June quarter rose 0.3%, taking annual inflation to 1% – right at the bottom of the Reserve Bank’s 1% to 3% target band.

Yet all is not well in the detail under that benign figure.

Price rises in the tradeable sector – that is, the parts of the economy exposed to global competition – actually shrank, largely because of the high New Zealand dollar pushing prices of imports down.

That was largely expected by economists.

Also pushing costs down in the tradeable sector is flat demand. In short, the economy is still, if not technically in recession, then certainly in a recession behavioural mode.

However, the non-tradeable sector – government costs, electricity, and housing, in the main – is up. This has been a pattern in New Zealand for some time (see graph).

This has been a long-running issue with the New Zealand economy but it is the electricity figures which give the most pause for thought in today’s figures.

Electricity prices are up 4.5% for the quarter. In a virtually flat economy, that is pushing up costs for the country’s struggling businesses.

The Reserve Bank has long complained about high electricity costs – they were, along with local government rates and house prices, the chief bugbear during the boom-cum-bubble of 2004-07.

House prices have come off, even if they have not collapsed to the level forecast by some of the more excitable commentators.

Local government rates have not pared back so much – as Prime Minister John Key told Local Government New Zealand’s’ conference yesterday – but they do not feature as prominently in today’s figures, mostly because rates are not set until later in the year.

But electricity costs – largely set by the state-owned companies – remain stubbornly high.

That is a sub-part of a longer-term issue: that the non-tradeable sector can be adding significantly to price inflation even when the tradeable part of the economy is suffering.