Surging electricity costs are a fresh source of inflationary pressure.
Driving the news: This week's Consumer Price Index report showed costs for electricity in the U.S. climbed at their fastest rate in 40 years.
- In August, average electricity prices were nearly 16% higher than they were in August 2021.
Why it matters: Like high gasoline prices, escalating electricity costs act as a tax on consumer spending, potentially slowing the economy.
- On a more personal level, it’s a hardship for many families. Over 20 million U.S. households have fallen behind on their utility bills, as Bloomberg recently reported.
- Those delinquencies, and the end of pandemic-related moratoriums on utilities cutting service, sets the stage for a “tsunami of shutoffs,” one observer told Bloomberg.
The big picture: Surging American electricity costs are a distant but direct consequence of the Russian war on Ukraine, which created arguably the biggest shock to the global energy system since the oil crisis of the 1970s.
How it works: Prior to the war, Russia was the main supplier of Europe's imported energy in the form of oil, natural gas and coal.
- Since the invasion, sanctions and embargoes disrupted those supplies. (Russia just cut off all natural gas flows to Germany via its Nordstream 1 pipeline under the Baltic sea, for instance.)
- European prices for these products exploded higher as a result.
- Those high prices attracted imports from around the world — including from the U.S., via stateside export terminals that liquefy the gas for overseas shipping.
- To compete with high European prices, U.S. natural gas prices have risen too — though not as much. The U.S. benchmark for wholesale natural gas is up about 70% over the last 12 months, while the European benchmark has skyrocketed by roughly 240%.
- Since natural gas is the source of about 40% of U.S. electricity generation, those higher prices feed through to higher monthly bills.
Yes, but: America's system of regulated utilities, which forces some power providers to get regulators' clearance for price increases, means Americans are being spared the full impact of the gas price spike.
- It's cold comfort — but at least electricity bills aren't up 70%, as natural gas prices are.
What we're watching: How Washington policymakers respond to the inevitable rise in consumer complaints about soaring electricity bills.
- After all, the wave of consumer complaints that followed the upsurge in electricity prices in the 1970s generated a rash of new regulations.
