How price hikes affect your tribe

Every six years the Australian Bureau of Statistics (ABS) takes a close look at where Australians are spending money. Last month it released its most recent data. We’ve used this data to analyse how our six retirement tribes choose to spend their money and, based on this information, we have adjusted our June 2017 Retirement Affordability Index.

Although the consumer price index (CPI) continues to be relatively low, at just 1.9 per cent, the results for our retirement tribes reflected a different story. We have also seen a reasonable amount of difference in the impact upon the retirement tribes.

The impact on retirees
The results reveal that renters continue to face the highest increase in prices, with single renters facing the biggest yearly increase of expenditure at 1.7 per cent.

Close behind the renters are those who own their own homes and receive the majority of their income from an Age Pension. Couple owners have seen prices increase by 1.6 per cent over the last year.

Those who are least affected by the increases in living expenses are those who own their own homes and receive the majority of their income from private sources, such as superannuation. Couples in this category are affected by increases in living expenses of only 1.3 per cent.

The rise in the cost of living over the past 12 months has been mainly driven by housing and medical costs. This explains why renters, who spend a larger proportion of their income on housing (rent), experienced a greater increase in expenses. While the rise in medical expenses hit all retirement tribes, the effect on those with private incomes is larger because they tend to spend a larger proportion of their income on health, including private health insurance.

Offsetting the price increases are price reductions in transport (mainly cars) and recreation. These reductions are more beneficial to those on private incomes, as they typically spend more on recreation and transport.

Electricity prices have received a lot of attention recently. They remain largely unchanged because the price data, released by the ABS, covered the period up to 30 June and the hefty price increases, of 15 per cent and 20 per cent, occurred in July this year. The data for the next quarter should reflect these increases.

What’s really behind the energy price hike?
So why are electricity prices going up? Politicians certainly have lots to say about this and if you turn on your TV, you will be bombarded by stories about electricity and gas prices. With furious finger pointing, the government has been blaming renewables, the states, and the perceived ideological hatred of coal.

But beyond all the political fire and fury, what is really causing electricity prices to rise? And more importantly, what can be done to stop this rise?

Despite what you might be told, renewables have played almost no role in the recent price hike. The Renewable Energy Target, along with other policies to encourage renewable energy, make up just five per cent of most people’s electricity bills. This proportion has been pretty steady over the last five years or so.

It is mathematically impossible for something that makes up just five per cent of your bill to increase your electricity bill by 15 per cent. Instead, the increase in electricity prices comes from an increase in the wholesale price of electricity. The wholesale price is what the electricity generators receive.

Wholesale electricity prices have been low over the last five or so years, largely in part because the Renewable Energy Target has been encouraging new electricity generators into the market. More electricity generators means more competition and hence lower prices.

Recently, however, a number of important things have occurred to change this. First, a lack of any long-term policy signals from the Federal Government has discouraged investment in new electricity generators. The slowdown in new electricity generators has meant that when the Hazelwood Power Station closed, less new generation was available as a replacement.

At the same time, the price of gas increased three or four-fold because the east coast gas market opened up to the world market at the end of 2015.

A significant proportion of electricity generation comes from gas, and those generators are demanding higher wholesale prices as the cost of gas-fired electricity has increased dramatically.

Stopping the rise
So what can be done to stop the rapid rise in electricity bills? Slowing the flow of gas overseas by restricting exports is one option. This will lower the gas price, which will then lower electricity prices.

The other option is to create certainty in the electricity market, which will encourage renewables and other types of generators to be built.

Extending the Renewable Energy Target beyond 2020 or introducing a Clean Energy Target, as recommended by the Government’s Finkle Review, will encourage investment in new renewable generation. This will then put downward pressure on wholesale electricity prices.

As long as the political debate on energy continues to produce uncertainty, electricity prices will continue to rise. So, how have retired people coped with rising electricity prices?

Our YourLifeChoices Retirement Affordability Index survey recently asked how respondents reacted to the increase in electricity prices. Forty per cent of respondents said that they had cut back on nonessentials.

Worryingly, almost 20 per cent said that they had to cut back on essentials. Of those who had to cut back on essentials, almost a quarter (24 per cent) said they had cut back on food, while six per cent said they had to cut back on medical expenses.

Two thirds of respondents said they had reacted to the electricity price rise by cutting back on their use of electricity. When asked about the main method of cutting down on electricity use, 40 per cent said they had turned off appliances, while about a third said they had cut down on heating, and almost a quarter said they had installed energy-saving devices.

The recent rise in electricity prices is doubtlessly causing retired people to make significant and difficult adjustments to their lives. In the coming months, as more data is available, it will be interesting to see precisely how higher prices are affecting the lives and lifestyles of Australian seniors.

YourLifeChoices Writers
YourLifeChoices Writers
YourLifeChoices' team of writers specialise in content that helps Australian over-50s make better decisions about wealth, health, travel and life. It's all in the name. For 22 years, we've been helping older Australians live their best lives.
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