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Electricity Is One Part of US Inflation That Congress Can Help Tame


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(Bloomberg) We are less than a week away from the much-anticipated release of the Consumer Price Index, the key measure of US inflation, for July. As of June, US personal spending on energy goods and services (gasoline, electricity and natural gas) was running at an annual rate of $860 billion . That is a record in nominal dollar terms: US consumers have never spent more on energy. Even adjusted for inflation, US personal spending on energy was at an all-time high in June, having passed its previous March 2008 high in March 2022.

Record Energy | US personal consumption expenditures, energy goods and services (chain-type price index)

The chart above represents all energy consumption, but the contours of the line really mostly show the price of gasoline, the main driver of energy price trends. Compare it to another chart of US gasoline prices since 2010.

It's a Gas | US daily national average gasoline price (regular unleaded)

Note that because gasoline prices are available daily, we can see the significant pullback in prices since mid-June of this year. US daily average gasoline prices are now back to where they were in April — still much higher than at the start of the pandemic, but in decline for more than six straight weeks .

Gasoline’s combination of price volatility and price visibility makes it hard to ignore: We tend to fixate on giant numbers on the roadside and in nightly news reports. But there is a quieter, less volatile and still very significant energy service that all US consumers purchase to the tune of $200 billion annually — electricity. And that isn’t immune from inflation either.

Electricity prices have risen significantly since 2020, after nearly a decade of hardly any increases. As with overall personal spending on energy, the increase today is more marked than it was in 2008.

Electricity Gets a Jolt | US electricity consumer price index for all urban consumers

Electricity prices are not immune from general inflation. We can see how they trend compared to overall prices by charting the year-on-year change in electricity compared to the overall consumer price index. As independent researcher  Michael Giberson notes, any time that electricity trends above the overall CPI excluding energy, its real price is increasing; any time it is below CPI excluding energy, its real price is falling. For most of the 2010s, the real electricity price was indeed falling.

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Electricity prices have trended up since early 2021, but did so at almost exactly the pace of all items except energy. That pattern broke in February. While CPI less energy has peaked, at least for a few months, electricity is now up more than 30% year on year.

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Inflation Bites | US consumer price indexes, % change from one year ago

European readers will find US electricity price increases modest, compared to those in their own markets. Last week, German power for August was trading 23% higher than the daily average for the month, and next-month futures in France were indicating a 17% increase in day-ahead prices. But inflation matters wherever it might be, and in particular when it occurs in an essential service, since any jump in prices disproportionately affects lower-income consumers.

That is why the clean electricity proposals in the Inflation Reduction Act are important. Extending tax credits for wind and solar power generation should lower the cost of creating renewable power, and also provide price stability, given that wind and solar are not exposed to fuel volatility. A recent report from the University of Chicago found that subsidizing clean energy would lower electricity prices while significantly cutting climate emissions; as the energy journalist Amy Harder notes, it was the only policy of three studied (the other two being a carbon price and a clean energy standard) that did so over a 16-year period.

IRA provisions to keep nuclear plants online can help stabilize prices, too. And with a revamped electric vehicle policy focused on middle-income consumers, the bill means EV drivers could benefit from cheaper, and stably priced, charging.

Electricity has been a quiet consumable for years. It’s becoming a louder inflationary force. All the more reason to address it today, and cleanly.



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