Inflation is the talk of the town, and its affects are becoming more apparent, impacting groceries, fuel, and interest rates, as well as the purchasing power of your customers. As a business owner, labour shortages, supply chain bottlenecks and wage hikes are likely adding to your concerns. To succeed in a rapidly changing economic environment, your business will need to be agile, and you should closely monitor three key economic indicators over the next 12 months.
Inflation is a general increase in prices and a consequential decline in the purchasing value of money. There are several reasons why we are experiencing a rapid rise in inflation.
- The Reserve Bank of Australia’s (RBA) Quantitative Easing (QE) program: This program consisted of the RBA essentially pumping money into the economy through the purchase of government bonds. This was part of a suite of measures put in place by the RBA to provide support to the economy during its economic recovery from COVID-19. While the RBA ceased its QE program in February 2022, its impacts are still being felt.
Additionally, the RBA has slashed interest rates to record lows to create an environment that encourages individuals and businesses to take out a loan for purchasing assets (property, commodity, equipment, machinery) to stimulate the economy.
- COVID-19 lockdowns have created massive supply chain issues with goods now more difficult to transport and production disrupted. This undersupply has led to higher prices. As an example – the recent lockdown in China lead to 260,000 20-foot cargo containers having to remain in Shanghai in April as they were unable to be exported.
- Various COVID-19 stimulus provided by the government, including the JobKeeper scheme and HomeBuilder grants, increased liquidity in the economy, driving demand and hence inflation.
- The Ukraine-Russia war has led to higher commodity prices because of sanctions from many countries pushing up the price of oil and gas.
Australia’s latest March 2022 quarter inflation rate jumped to a 21 year high of 5.1% more than the RBA’s target of 2-3%. It is tipped to increase even further to peak at 6-7%.
Rising interest rates
Inflation is tightly linked to interest rates. The RBA ‘cash’ rate interest rate is a monetary tool of the RBA which allows for the RBA to increase its cash rate to cool inflation when inflation runs too high. The RBA has increased the cash rate twice recently, in May 2022 and June 2022, bringing the RBA rate from a record low of 0.1% to 0.85%. The big four banks expect the RBA rate could rise above 2% by the end of year, with some banks expecting the rate to increase to 2.6% in the first half of 2023.
Record low unemployment
Australia’s latest April 2022 unemployment rate stood at a 50 year low of 3.9%. The unemployment rate is expected to decline further to 3.5% in early 2023. This is largely because of the pandemic, as border closures and uncertainty caused some of Australia’s workforce on temporary visas to leave the country, while Australia’s soaring debt level has fuelled a rapid rebound.
What does this mean for my business?
It is more important than ever for businesses to keep track of their cashflows. Inflation will increase the cost of inputs and therefore increase operating costs. Pair this with both rising interest rates pushing up the repayments on loans and widespread labour shortages, and its imperative businesses plan for success.
Some strategies you might want to consider to boost or at least maintain cashflow include:
- Reviewing your prices and increase where possible/appropriate
- Increasing wages or providing extra benefits to retain staff
- Reviewing the interest rate on current bank loans and/or considering business funding options
- Securing stock amid tight supply chains
- Review operating costs and identifying any unnecessary spending
It is especially important to prepare your cashflow forecasts and budget, as these will help you to determine the impact economic factors are having on your business and will also assist you to secure funding, if required. Further, they will demonstrate which levers you can adjust over the next 12 to 24 months to better position your business. If you would like more information on positioning your business for growth through instability, please contact your local William Buck Business Advisor.