Inflation and Sustainability

Inflation and Sustainability

Written by Marcus Brown, Bull & Bear Economics

As we all learnt in the Federal election, the annual rate of inflation as at the March quarter of 2022 had reached 5.1 percent (or 3.7 percent if adjusted for volatile movements).  Over the past 12 months, fuel prices have increased from $1.60 per litre to as much as $2.20. The Australian Energy Regulator announced in late May 2022, that the Default Market Offer (DMO) price for electricity would rise by as much as 8.2 percent above inflation after 1 July 2022.  This increase in the DMO price has been driven by increases in wholesale electricity prices in New South Wales and Queensland of 40 percent-50 percent respectively.

Energy is a major input into nearly every product or service we purchase.  Rising energy prices are influenced by myriad factors many of which are unrelated, for example COVID supply chain friction and the invasion of Ukraine.

Historically, the threat of energy cost inflation has been a key driver in the adoption of solar panels, with consumers looking to de-risk their energy bills through onsite generation.

Natural gas has traditionally been seen as a cost-effective alternative to electricity for cooking and heating, however gas prices are experiencing significant increases as the global demand for gas surges, particularly with sanctions on Russian energy exports, and a pattern of almost annual write-downs in proved and probable natural gas reserves by Queensland’s major LNG producers.  While many householders will continue to prefer gas for cooking purposes based on familiar or cultural experience, the shift away from gas for heating will accelerate.

Economists tend to view things differently to other professions.  From an economist’s perspective a major driver of consumer behaviour is self-interest.  Households are not commercial enterprises, but householders seek to minimise costs and maximise private benefits.  The key outcome from consumer research we have undertaken indicates that many householders make investment decisions based on four key factors, which we like to call the four C’s:

  • Cost
  • Comfort
  • Convenience
  • Certainty

The priority of each of these factors varies based on where households sit on a life cycle.  For example, those on fixed incomes (e.g. retirees and pensioners) tend to prioritise ‘certainty’.  In other words they will take steps to de-risk their future costs, consistent with the uptake of solar panels by this group.

Measures related to home insulation or cross ventilation are viewed as ticking the box in reducing an ongoing ‘cost’, but also delivering ‘comfort’.  ‘Convenience’ relates to how easily a measure can be adopted.  For owners of existing homes where sustainability measures require retrofit, ‘convenience’ or lack thereof can be the definitive impediment to the adoption of such measures.  The sales of water tanks collapsed when they ceased to be mandated as part of new builds, but they continued to fall away once businesses stopped providing a ‘one stop shop’ for tank installation.

In the immediate term, high energy inflation could be one of the most significant drivers of the adoption of energy saving measures in the home and adoption of electric vehicles.  For nearly 30 years, inflation has not been a significant issue for the Australian economy to address, however now that it has returned as a policy challenge, the risk it poses to household budgets and business costs will invariably prompt energy consumers to investigate means of mitigating price risk and reducing costs to maintain a level of comfort and productivity.

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