The latest inflation figures showed a jump in the growth of average prices from 3.6% to 3.8%. But they also indicate just how much our economy is caught up in the ramifications of Russia’s illegal invasion of Ukraine, which sent gas prices higher – and with it our electricity prices.
The October consumer price index figures were a turning point for data in Australia. It marks the change of the official CPI figures going from quarterly to monthly. This is pretty much the biggest data shift since the labour force figures back in 1978 did the same switch from quarterly to monthly.
The move is a good one, given most nations in the OECD measure prices monthly. It gives the Reserve Bank and the government more regular information.
For a number of years, the Australian Bureau of Statistics had been testing measuring inflation monthly, but it left out a few things while it worked out how to count everything. As a result, the latest figures are slightly different from the old monthly figures:
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On the old measure, inflation was slightly lower than the new official measure.
This is also reflected with the “trimmed mean” measure of underlying inflation. While the old monthly figures suggested underlying inflation was below 3%, the new official figures have it at 3.3%
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The underlying inflation measure will probably take on more importance now that the official measure has moved to a monthly survey. The overall CPI figures will now be rather more noisy than they were when they involved an average of three months.
You can see how this affects things when you look at the monthly growth since April 2024 (which is how far back the official monthly data goes). Rather oddly, despite the annual inflation figure rising in October, in October itself inflation did not rise at all:
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This weirdness is even more stark when we look at the biggest drivers of inflation:
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Electricity was the biggest driver of inflation over the past year, but in October electricity prices fell 10.2%.
This confusion is due to the interaction of electricity rebates and inflation.
In July 2023, the Albanese government introduced rebates to protect against the increase in prices due to the Russian invasion of Ukraine. In July 2024, the states began to get involved as well. And October last year saw the largest impact of the federal and state government rebates on electricity prices:
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But these rebates did not last, and over the past 12 months they have begun to be unwound – and so prices began to rise. Then in August they were extended across a number of areas – and so electricity prices fell again.
But they remain well above where they were in October last year.
Importantly, inflation is the growth of prices from one month to the next, and from one month to the same month the following year. So purely because last October was the month where the energy rebates had the biggest impact, the annual growth in electricity prices since then looks massive.
Were the government rebates not put in place, electricity costs would be about 31% higher now, but the growth (or inflation) of electricity costs would be lower.
But then the question is: why were these rebates needed, and what the heck does it have to do with Putin invading Ukraine?
The problem for Australia is that since the opening of the Gladstone LNG terminal, gas prices on the eastern seaboard have been linked with the world price of gas. Because Russia is a major producer of gas, its invasion of Ukraine and subsequent sanctions of Russian gas and other trade sent world gas prices soaring – doubling from January 2022 to September that year.
Gas is a significant generator of Australia’s electricity, but it is also among the most expensive. However, the way the national energy market operates is that the most expensive source for electricity determines the price at any point in time.
When renewables are able to supply 100% of our electricity, they will determine the cost and prices will be much lower. But because gas often sets the prices (because gas-generated electricity is needed to meet demand), that means there is a very strong link between gas prices and electricity:
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Without the energy rebates, electricity prices would have followed gas prices up, and the hit to households would have been much greater.
On the other side of the coin, the boom in gas prices has led to gas companies making out like bandits.
The value of gas exports from Australia is nearly four times what it was a decade ago. Alas this massive windfall gain for gas companies has not led to a windfall in revenue of the government in the form of the petroleum resource rent tax – if anything, revenue has fallen:
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These latest inflation figures will give few people any joy – not the RBA, nor the government, nor any of us looking at our bills. But they will continue to give comfort to energy and gas producers who know their windfall profits will remain largely untouched by Australia’s tax system.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work