Inflation and business costs rise while consumer confidence weakens

If rising business costs are starting to bite, brace yourself because things look poised to get worse before they get better.

In July, Treasurer Jim Chalmers told Parliament that annual inflation is expected to peak at 7.75 per cent in the December quarter 2022.

The Australian Bureau of Statistics (ABS) reported that inflation was running at 6.1 per cent in the year to June – the biggest rise in inflation since the GST was introduced.

“The current expectation is that it will get worse this year, moderate next year and normalise the year after. We haven’t reached the peak yet, but we can see it from here,” Chalmers said.

“Treasury expects headline inflation at 5.5 per cent by the middle of next year, 3.5 per cent by the end of 2023 and 2.75 per cent by the middle of 2024.

In the meantime, customers are feeling gloomy. The ANZ-Roy Morgan Consumer Confidence rating was at 82.4 in the last week of July but is 18.3 points below the same week a year ago. Consumer confidence is down by – 10.2 points below the 2022 weekly average of 92.6.

“Confidence remained very weak and at levels last seen during the early stages of the COVID-19 pandemic,” says ANZ head of Australian economics, David Plank.

So what’s behind the jump in inflation?

One factor is COVID-19. It has disrupted supply chains around the world, delivery times were pushed out and the costs of production rose.

Another is Russia’s invasion of Ukraine, which caused major disruptions to the global markets for energy and food, pushing their prices up.

A skills shortage is also to blame, with many companies reporting that it is a significant constraint on their ability to operate or expand. Indeed, almost a third of employing businesses participating in a recent ABS survey said they were having difficulty finding suitable staff.

Locally, floods and new COVID-19 variants are also causing supply chain disruptions and worker absences.

Another factor contributing to rising inflation is the increased costs of building new dwellings.

According to the ABS, shortages of building supplies and labour, high freight costs and ongoing high levels of construction activity continued to contribute to price rises for new dwellings.

Unfortunately, many people’s wages haven’t kept up with inflation. According to Chalmers, real wage growth over the past decade has averaged just 0.1 per cent a year.

But in June, the Fair Work Commission handed down its annual wage review decision, providing workers on the minimum wage a 5.2 pay increase. Those on awards will receive either 4.6 per cent or $40 a week, whichever is higher.

Chalmers didn’t expect this to have a big impact on wages. He told Parliament that nominal wage growth of 3.75 per cent is expected in this financial year and the next, and said real wages would start growing again in 2023/24.

But businesses are feeling the pain. Nearly half of all businesses polled by the ABS in June said they were experiencing increases in their operating expenses. They said general costs were rising as well as the cost of products, materials, fuel and wages.

When considering the month ahead, 44 per cent expected operating expenses to rise. The ABS says the proportion of businesses expecting an increase is the highest recorded since the question was first asked in July 2020.

So, what can you do to ease the impact of rising inflation? Here are some tips:

  • Watch your cash flow carefully. If costs are rising and customers are slower in paying, you need to speed up your invoicing. Conduct a credit check on new customers and tighten up on your terms of trade.
  • Review expenses weekly. If expenses are rising, you need to know quickly and take fast action.
  • Examine where you can cut costs without reducing the quality of your goods and services. Eliminate waste and inefficiencies.
  • Try renegotiating contracts and terms with suppliers and even asking them to reduce their prices.
  • Increase your prices. But keep an eye on your competition. If they raise prices, raise yours by a bit less.
  • Eliminate offering products and services with small margins or don’t move.
  • Target more profitable customers and higher margins.
  • Invest in automation and technology to cut costs, save time and improve your customer experience.
  • Stock up now on goods that could experience big price hikes or shortages. What inventory can you cut?
  • Look after your staff. Hiring and training can be expensive.
  • Test your business’ ability to weather different scenarios of inflation and interest rates.

If your business is seeking solutions to increased operating expenses please contact us today.

by Zilla Efrat – journalist