Yet again a day opens with a torrent of news around the themes of this blog. The opening salvo has come from Scottish and Southern Energy (SSE) who have announced this.
Changes to household energy tariffs from 15 November
10 Oct 2013
Household electricity and gas tariffs to increase by average of 8.2%
Changes reflect increasing cost of buying wholesale energy, paying to deliver it to customers’ homes and government-imposed levies collected through energy bills.
I will return to their rationale in a moment but for now I would like to add in something which I discussed only on the 3rd of this month and some on Twitter have pointed out they received notice of today.
They too are at the institutionalised inflation game, if the email they have sent me is any guide.
From 4 January 2014, we’re putting some of our prices up. Line rental will go up by just 3.5 per cent – from £15.45 to £15.99 a month.
Also I note that prices not quite so headline seem to be going up at an even faster rate.
Calling features will increase up to 6.5%.
There were several replies on that particular article pointing out other prices rises including something which had been badged as “free”. Accordingly the word ‘free’ makes its way into my financial lexicon for these times. Also that day covered the price increase on National Lottery Lotto tickets from £1 to £2 which was an inflationary rise for those who bought a single or indeed an odd numbers of tickets, not forgetting those who had sets of favourite numbers.
So we have institutionalised inflation on the march again in the UK and as I shall explain later it is interesting timing. But before I do so there is another example as the UK coalition government announced this yesterday. From the BBC.
Some rail fare increases in England will be capped at 6.1% under government plans to overhaul ticket pricing.
As that represents treble the inflation target and nearly six times the current rate of increase of wages I wonder how grateful they expect “hard pressed commuters” to be! After all whilst they may not now get a 9.1% rise they will be even more hard-pressed. Also I note a casual acceptance of institutionalised inflation in this.
Under current regulations, fares would go up by an average of 4.1%, with train companies allowed to add a further 5% on top of the average rise.
After all that average is still double the inflation target.
Of course the Bank of England our supposed inflation sentry calls these increases in “administered prices” and washes its hands of them in a Pontius Pilate like fashion. Perhaps at some point it will let us now which price rises, if any, it does think it can try to control.
Back to SSE
We do get something of a rationale from SSE from the price increase here.
The average price of securing energy for 2013/14 over the last 24 months has been around 4% higher than it was for last year, putting upward pressure on prices.
I guess the year on year comparison did not give the answer they wanted but even on their preferred rationale there is something of a gap between 4% and 8.2%. Let me help out a little with a tweet I sent out earlier.
#SSE the price of a barrel of Brent Crude Oil in £ pounds is 3% lower than this time last year!
A bit awkward that although as I shall discuss further in a moment UK energy policy is, if one is being polite, something of a shambles as was discussed on the 25th of September on here. Indeed as I was checking on the state of play in the Netherlands (also a country with inflation issues) I spotted this today from its statistics body.
Also gasoline was less expensive than last year. In September cost 1.76 euros a liter of unleaded at the pump, last year it was 1.82 euros.
Yes the Euro exchange rate has risen but a lot of that has come recently and we know that improvements take quite a while to feed through the price chain unlike rises. So are SSE buying the “wrong” sort of energy?
UK Energy Policy
The themes discussed back on the 25th of September are reinforced by this from Reuters (h/t @EZR_news ).
The new gas year starts on October 1, when European gas buyers and sellers adjust supply volumes ahead of the peak demand winter heating season.
But Norway’s biggest gas field Troll, which accounts for around 35 percent of its gas production, has had its capacity reduced for much of this year, and its operator says supplies will be limited until 2014.
News about Norway’s gas outage extending throughout the winter has forced British gas traders to buy more forward contracts in order to hedge against any further supply disruptions from Britain’s key gas supplier.
How is the “dash for gas” driven by the UK’s political class going?
There are two clear implications from this. Firstly to the extent that this is not allowed for in the current round of price increases any cold snap will put further upwards pressure on gas prices. Secondly with capacity constraints tight and the UK economy in a ‘boomlet’ leading to rising demand we could see a lot more of this from the Department of Energy and Climate Change.
Working to improve the levels of demand side responsiveness
Low carbon policies
This is something of an IED or landmine partly because our political class implement them leading to a rise in costs and they then operate a policy of denial. The regulator OFGEM calculates that they currently add 6% to electricity bills and 11% to gas ones and we know that the bill is rising. Indeed SSE explain this thus.
The cost of government taxes paid for through energy bills – supported by the major political parties – is 13% higher than a year ago. These are initiatives like the Energy Company Obligation (ECO) energy efficiency programme, and support for producing low-carbon energy which together represent towards 10% of a typical bill. This cost has more than doubled in the last four years.
Whilst there is an obvious moral hazard issue in blindly relying on SSE’s numbers they did have energy minister Michael Fallon on the run on Sky News this morning. Congratulations also to Eamon Holmes who pressed the minister hard as he admitted that in the course of the interview his stated 4% (for the impact of energy taxes and measures) had metamophosed into 10%. At best he was confused and at worst he was deliberately misrepresenting the position. Neither does him any credit. Perhaps he should avoid any job which involves the use of numbers.
UK inflation trends
The irony of all this was that UK inflation was showing signs of trending downwards as, for example, the recent strength of the pound would have put downward pressure on oil and commodity costs. Although apparently our energy suppliers have missed that memo! Also the initial impact the the university tuition fee increase was soon to fall out of the annual measure.
There is a catch here as annual inflation will actually fall due to SSE as (h/t @econhedge) they raised prices by an average of 9% last year. So we are reminded one more time that using only annual numbers as a guide to inflation can be misleading. Also we may have to find ourselves checking whether the word “average” needs to go into my financial lexicon for these times. But more fundamentally will any possible dip in inflation be responded too by those with the ability to pump up a bit of institutionalised inflation? Is there a queue?
Back in the dim and distant days when I started this blog I established the theme that inflation would be a more and more important issue as time passed. In my opinion back then (and now..) there were ways in which it and the credit crunch would combine to have a very adverse economic impact on people. This was against the views of economics 101, the majority of economists and certainly the Bank of England which was fearing price falls in one of even its most incompetent phases.
I noticed the beginnings of a grudging acceptance of this view when many benefits increases were capped at 1% as others faced the prospect of what this might mean in real terms. Now as we see wage rises of 1.1% compared to inflation consistently over target and currently 2.7% reinforcing real wage falls of around 9% already in the credit crunch era the consequences of the fears I outlined are crystal clear. Even worse the price rises have been concentrated in essentials (defined by many economists and central bankers as non-core) such as food and today we see further rises in energy prices. So in “real real” terms if I may abuse English a little most people are even worse off than they think and the poor are being economically brutalised.
So when you read elsewhere, and you will have plenty of opportunity, that inflation does not matter, think of someone at or near the minimum wage receiving the latest energy price rises…..