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Credit: Eduardo Soares

Aussie inflation eases. What’s next?

The latest Australian Bureau of Statistics report reveals that Australia’s annual inflation rate slowed down in February. 

This is a positive sign for businesses, particularly small and medium-sized enterprises (SMEs), who have been struggling to cope with the rising costs of raw materials and other inputs.

According to the report, the consumer price index (CPI) rose at an annual pace of 6.8 per cent last month, which is a drop from January’s 7.4 per cent pace. Smaller increases in fuel and housing prices largely drove the slowing inflation rate.

Michelle Marquardt, ABS head of prices statistics, said: “This month’s annual increase of 6.8 per cent is lower than the 7.4 per cent annual rise reported in January 2023. This marks the second consecutive month of lower annual inflation, also known as ‘disinflation’, from the peak of 8.4 per cent in December 2022.”

Can inflation drop delay rate hike?

The recent drop in Australia’s annual inflation rate to 6.8 per cent could give the Reserve Bank of Australia (RBA) the excuse it was looking for to pause its tightening policy. If economic indicators continue to trend downward, the last rate hike to 3.6 per cent may have marked the peak in this cycle.

This latest development adds to the growing evidence that the worst price increases may have passed, which is a welcome relief for SMEs grappling with high inflation and other economic challenges.

Relief for SMEs

According to experts, the recent drop in Australia’s annual inflation rate could have mixed effects on small and medium-sized enterprises (SMEs). On the one hand, a decrease in the cost of raw materials and other inputs could make it less expensive for SMEs to operate, which could translate to lower prices for consumers and increased demand for SME products and services.

However, if the drop in inflation coincides with a decrease in consumer spending or a reduction in business investment, it could have a negative impact on SMEs. This is because SMEs often rely on consumer demand and business investment for their survival and growth.

In addition, if interest rates were to rise due to the drop in inflation, it could increase the cost of borrowing for SMEs, making it more difficult for them to access funding for growth or other business needs.

According to Anneke Thompson, CreditorWatch Chief Economist, the recent monthly CPI data indicates that inflation is still decreasing. 

“This news is particularly positive for borrowers as it demonstrates that the Reserve Bank of Australia’s (RBA) decision to increase the cash rate in order to lower inflation is starting to yield positive results. Yesterday’s retail trade data also showed that spending in Australia has remained steady on average since September 2022,” she said.

“There are some areas, however, where prices continue to rise. The cause for most concern is rent, which is a rare category in which price rises are not moderating. Rents grew 4.8 per cent over the year to February 2023, the same as the month prior. In contrast, the increase in the cost of building a dwelling, while high at 13 per cent year-on-year in February 2023, had moderated since January when it was 14.7 per cent.

“Unfortunately for renters, it is likely that these price increases will stay elevated as the housing supply cycle moves to an abrupt slowdown once the stock under construction completes. 

“Given that younger people tend to either rent or be in the very early stages of paying off any home loan if they are homeowners, it is not surprising that CreditorWatch’s Business Risk Index data for February 2023 shows that areas, where the median age is relatively young, are likely to have higher levels of business insolvency. The opposite applies to areas dominated by older people.”

According to Simon Docherty, Chief Customer Officer of Frollo, the drop in inflation indicates that the monetary policy measures implemented by the Reserve Bank of Australia (RBA) are beginning to have a positive impact.

“This is welcome news for Australian consumers who have been struggling with the rising cost of living over the past year,” he noted.

“Data from our budgeting app shows that consumers have been allocating an increasing portion of their income towards essential expenses like groceries, healthcare, and insurance. Many have also turned to unregulated credit sources such as Buy Now Pay Later providers, with the average BNPL user spending over $400 per month on repayments.

“As a result, it was only a matter of time before consumers began to reduce their spending and tighten their budgets. However, policymakers must balance the need to slow down the economy with the potential impact on consumers and small businesses.

“It’s important to ensure that the economic slowdown doesn’t have a severe knock-on effect on everyday Australians.”

More here.

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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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