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The ANZ Bank said it expects electricity and gas prices to contribute around 0.6 ppt to annual headline consumer price inflation of 7 per cent by end-2022 and businesses will have to start passing the increased costs onto consumers.
In its latest analysis, the ANZ said retail electricity prices will rise sharply in quarter three but electricity credits for households in some states will dampen the immediate effect on the consumer price index (CPI), with the full effect to come through in the following quarters.
This will mean there will be second-order effects on the CPI as businesses pass on at least some of their increased energy costs to consumers.
ANZ chief economist Catherine Birch said electricity accounts for around 2.4 per cent of Australia’s CPI basket, while gas and other household fuels account for 1.0 per cent.
“While this is a small share of overall household spending, we estimate double-digit price growth in 2022 will contribute a hefty 0.6ppt to consumer price inflation of around 7 per cent by year-end,” she said.
“Wholesale electricity and gas prices have shot up due to a confluence of factors, as noted by the Australian Energy Regulator, including planned and unplanned power plant outages, higher global coal and gas prices, slowing investment in new capacity and increasingly ‘peaky’ demand.”
Ms Birch said these factors have been exacerbated by the war in Ukraine, flooding in NSW and Queensland and a cold start to winter.
“But an underlying issue is the lack of coherent energy and climate policy in Australia for the past several years which has undermined investment in the energy sector. This has left the sector more vulnerable to shocks,” she said.
Although state governments are issuing cost-of-living payments the ANZ said this will only delay the full effect of the energy price hikes.
“Recent history shows these payments have significant effects on electricity prices in the CPI. Consequently, the full impact of sharply higher retail electricity prices will not show up immediately, with some of the increase to come through in following quarters,” Ms Birch said.
“The spike in energy prices will have indirect effects on consumer price inflation as businesses pass on at least some of the increase in energy costs by lifting prices for their goods and services. This will put upward pressure on the CPI across a broader range of goods and services.”