From fuel costs to borrowing pressure, Australian small businesses are being squeezed on every front. Oliver Hume Chief Economist Matt Bell unpacks the numbers behind the pain.
What’s happening: Australia’s February Consumer Price Index came in slightly softer than markets expected, but economists are already looking past it. Underlying inflation held steady at 3.3% and headline inflation eased from 3.8% to 3.7%, according to the Australian Bureau of Statistics. The bigger concern is what comes next.
The CPI figures from the Australian Bureau of Statistics offered a small amount of relief. Headline inflation moved from 3.8% to 3.7% in February, and underlying inflation held at 3.3%, broadly in line with what the Reserve Bank of Australia had forecast.
But Oliver Hume Chief Economist Matt Bell says the headline number is not the story.
“It’s not today’s result that is of concern for the RBA or consumers, it’s the coming spike in March and beyond,” Bell said. “The driver of inflation and rates has clearly shifted from the domestic to the global.”
Bell points to the Middle East crisis as the key variable now shaping the outlook. Fuel prices have risen sharply in response to the conflict, and Treasury is expected to forecast inflation rising into the high 4% range as those costs flow through more broadly, Bell said.
The RBA had already forecast CPI to peak at around 4.2% in mid-2026 before easing. That forecast predates the latest escalation in the Middle East, meaning the outlook may be more challenging than the central bank previously anticipated.
Customers are pulling back
The RBA has raised the cash rate twice in quick succession, with back-to-back hikes lifting the rate to 4.1%. All four major banks are forecasting at least one more increase, potentially as early as May.
For small businesses, that matters beyond loan repayments. Higher rates are hitting the people they sell to.
Bell noted that early signs from weekly measures of consumer sentiment show consumers are at all-time lows, below even pandemic levels.
That shows up in the numbers. Nearly half of Australian SMEs, 45%, have delayed growth opportunities over the past 12 months due to cash flow concerns, according to Banjo Loans’ SME Compass Report. Half of all SMEs surveyed said they could run out of cash within six months if new revenue stopped today.
Long-term business confidence has also slipped, falling from 77% to 71% among SMEs surveyed, with 86% now expecting to meet revenue targets in 2026, down from 89% the year before, the same report found.
Costs hitting the supply chain
The pressure is not only coming through interest rates and consumer caution. Bell flagged that transport costs for materials and labour suppliers have already risen and are being built into upcoming price increases, which will largely be passed on to consumers.
For small business owners in trade, hospitality, construction, and retail, this creates a difficult position. Costs are rising before they can be fully recovered through pricing, particularly when customers are already stretched.
Industry data suggests the number of businesses expecting input and energy cost rises is double those expecting to raise their sales prices. Analysts say this indicates much of the inflationary pressure will be absorbed on balance sheets rather than passed through to customers.
The rate outlook is murky
Bell described the rate outlook as uncertain in both directions. Prior to today’s CPI result, markets had priced in another hike by July and a second by October. But he said the picture is complicated by competing forces, deteriorating inflation on one side, and the economic drag of global uncertainty on the other.
“The RBA will have to balance the deteriorating inflation outlook, even if it is only short term, with impacts of increased global uncertainty on economic activity and wealth,” Bell said.
The easing of the unemployment rate to 4.3% in February, Bell added, would have been welcomed by the RBA as a sign that some heat is coming out of the economy. Low unemployment has helped cushion the impact of cost-of-living pressures on spending, and without it, the flow-on effects for businesses and credit conditions would likely have been considerably more serious.
For small business owners, Bell’s message is that the demand fundamentals remain in place, but plunging consumer sentiment and a potential return to elevated supply costs are serious risks for the months ahead.
“The outlook for property for the remainder of 2026 has become as uncertain as the outlook for the Middle East crisis and rates,” he said. “Fundamentals remain in place for ongoing strong demand, but plunging consumer sentiment and a potential return to excessive construction cost growth are serious risks.”
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