SMEs investment and employment impeded due to electricity price hikes outpacing inflation

The price of electricity increased 8.9% last quarter, according to the latest ABS Consumer Price Index (CPI), prompting the nation’s peak employer body to warn that businesses are at ‘breaking point’.

 The Consumer Price Index (CPI) rose 0.6 per cent in the September quarter 2017, with the most significant price rises that quarter being electricity (+8.9%), tobacco (+4.1%), international holiday travel and accommodation (+4.1%) and new dwelling purchase by owner-occupiers (+0.8%). These rises are partially offset by falls in automotive fuel (-2.3%) and telecommunication equipment and services (-1.5%).

According to Adam Carr, the chief economist with Australian Chamber of Commerce and Industry (ACCI), the figures confirm businesses are being ‘hit hard’. Noting that businesses account for 70% of electricity usage in Australia, he said electricity prices have increased nearly 20% since mid-last year and that many businesses have seen their bills double in the past year.

“The problem is that electricity is up 20% but overall inflation remains low at 1.8%, meaning business prices are up less than 2%,” Carr told Dynamic Business. “Competitive pressures are a huge reason why the overall CPI is quite low – businesses, particularly in the retail space, just don’t have pricing power. Ecommerce has played a role, as have competitive new market entrants such as Aldi and Costco, and Amazon is about to kick in.

“Consequently, profitability and margins are being squeezed, particularly amongst small businesses that rely on electricity as a key input. They’re unable to pass on the increasing cost to consumers because when prices are hiked above and beyond the CPI, consumers notice – they say, ‘inflation’s low, so why are they raising prices?’ Businesses are having to absorb the increasing cost of electricity and the way they absorb it is either by not employing or not investing and in some cases, it means letting staff go.  Consequently, many are at breaking point.”

Carr warned of business closures in the event that Australia’s energy crisis is not solved soon. Although he said the recent ACCC inquiry into retail electricity pricing provided great insights into factors contributing to the crisis, “such as network costs, issues at the wholesale level and gas prices”,  he admitted solutions “aren’t necessarily so easy to identify”.

He added, “At ACCI, we think a good step is getting more gas supplied to the market. We’ve been advocating for lifting blanket bans on fracking. That’s not to say there are legitimate instances where it shouldn’t occur, but it shouldn’t be a blanket ban – it should be assessed on a case by case basis.”

Related: Soaring electricity costs putting SMEs under ‘unacceptable pressure’, ACCC inquiry finds