The latest inflation figures have shown a significant increase of 7.8 per cent in the December quarter, putting pressure on the Reserve Bank to consider raising interest rates during their first meeting of 2023.
The Reserve Bank of Australia had estimated that inflation would peak at 8 per cent.
The figure is higher than the September figure of 7.3 per cent, and while it may cause concern, economists and the federal government hope that this will be the peak for runaway prices. Moreover, the consumer price index, which measures the changes in the prices of goods and services that households purchase, rose by 1.9 per cent in the December quarter.
This high level of inflation is causing concern for businesses and highlights the importance of the government taking measures to address the issue by ensuring their budget and policy settings are appropriate.
According to Gavan Ord, Senior Manager of Business and Investment Policy at CPA Australia, the latest inflation figures show that prices are continuing to rise at high levels in 2023. He suggests that it is too early to say that inflation has peaked and that the high inflation figures have increased the likelihood that the Reserve Bank will increase interest rates at their first meeting of the year.
Despite the rise in interest rates, Ord states that CPA Australia’s members are reporting that consumer spending has yet to decrease significantly. Christmas sales have held up despite the price increases.
He attributes this to the fact that people were willing to splurge during the festive season after two years of lockdowns and restrictions due to COVID-19. However, the impact of earlier interest rate increases is yet to be fully felt, and the big question is when spending will start to decrease.
“The hangover has yet to kick in for businesses, but they must be prepared. One of the first signs will be declining sales of discretionary products and services. Consumers may spend more on lower-value goods than on higher-value products. Businesses should seek advice if they are concerned about navigating the spending downturn.”
Is it going to get worse?
According to ACCI Chief Executive Andrew McKellar, “it is far too soon to declare inflation has been beaten.” He notes that even if inflation is peaking, it is doing so at a 30-year high, and the Reserve Bank is right to be cautious about persistent high prices. Until there is a clear and lasting decrease in inflation, the Reserve Bank is likely to proceed with a rate increase in February.
The Reserve Bank has a difficult task in navigating the current high inflation environment and must be cautious not to burden households and businesses with their actions further. In the upcoming May budget, the government must take steps to rebuild confidence in its ability to manage public finances and make progress in its efforts to address the budget deficit.
So what does this all mean for businesses?
Rising inflation can significantly impact small businesses, as it can lead to increased costs for goods and services, which can make it difficult for them to remain competitive in the market. This can lead to a decrease in profits and an increase in unemployment. In addition, higher interest rates can make it more expensive for businesses to borrow money, leading to a decrease in investment and economic growth.
Furthermore, as prices rise, consumers may be less likely to purchase goods and services, which can decrease demand for small businesses products or services. This can lead to a decrease in revenue and make it difficult for them to stay in business.
Businesses are facing additional challenges, including disruptions to international supply chains, a tight labour market, and rising energy costs. With its surge in demand, the holiday season has also contributed to inflationary pressures, with notable price increases in travel, accommodation, food, and other discretionary expenses.
“For business, international supply chain snags continue, the labour market remains tight, and energy prices continue to increase,” Andrew said.
“Surging demand in the lead-up to the Christmas holidays was a key driver of inflationary pressures, with price rises recorded across travel, accommodation, food, and other discretionary expenses.
“The Reserve Bank has a difficult path out of the current high inflation environment and must be cautious that its next steps don’t squeeze the life out of households and businesses.”