Saturday, August 22, 2009

By 2012, electricity will make up 10% of household expenses

MONEYWEB: This is going to create a price shock of which we have not seen since the oil shocks of the 70s. It was the oil shocks of the 70s that coined the phrase stagflation. Is stagflation what South Africans are going to remember most about the second decade of this century?

WIKI: Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.

Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country.Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply.
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There are rumours that on September 30 Eskom will be asking for a 40% price hike each year for the next three years. Reports say that this could see our electricity prices more than double. Just doubling our electricity bill would be a relief - what South African households will actually experience is electricity that is 267% more expensive in 2012 than 2008. Simply adding percentage hikes together does not show the compounding affect of price hikes on top of price hikes.

If one looks at 2008 figures for household consumption, electricity makes up 3% of our total household expenditure.  However, if all other goods and services only increase in line with an inflation rate of 6%, the amount of household income spent on electricity will rise to 10%.

Although large users of electricity like steel manufacturers, mines and smelters can all negotiate rates, smaller businesses will simply have to accept the price increases and hand this on to consumers.
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