Inflation - What is going on?
Australia's inflation rate as at January 2023 is at 7.4%. Meaning on a rolling 12 month basis, the price of a basket of goods a year ago that cost $100 now costs $107. Whilst that doesn't sound like much, when you compare that to the average over the past few years of 1-2% due to the uncertainty with COVID, it is a big shock to the economic system. In fact the last time inflation was this high in Australia was in late 1987 - over 35 years ago.
The RBA's stated target is that for a healthy economy inflation should be somewhere between 2-3% - very much below the current rate. However the only lever at their control is interest rates, so this is why we have seen the rate increase consistently to levels not seen since 2012, and the market does not appear to believe we have hit the end of this cycle.
But this is not just an Australian problem. All around the world countries are dealing with the specter of inflation eating away at real incomes. This is stemming from a mix of excess demand as the world emerges from the post-COVID era, the still unresolved Russian invasion of Ukraine and other unpredictable climate disasters.
Where is inflation increasing the fastest?
Per the RBA's last report:
Rental prices and the cost of new dwellings. Rental vacancies are at historic lows in not only the capital cities but also regional areas, and with immigration now opening back up to meet the workforce vacancies this is only expected to worsen.
Holiday travel and accommodation. Supply is still catching up with the pent-up demand for a post-lockdown world.
Food and non-alcoholic beverages
This is from a combination of supply issues both locally (floods in NSW) and overseas (Ukraine is considered the "breadbasket of Europe") along with increased input costs to farmers.
Other areas of increased costs include:
Shipping and freight costs have slowly started to come back to a more reasonable level with China opening back up to the world, but petrol prices have remained stubbornly high since the Ukraine invasion sitting between $1.80 to $2.10.
The lack of qualified staff has been an ongoing struggle for the last year as businesses continue to re-emerge from the pandemic. In sectors such as hospitality, easily accessible pools of labor such as university students are taking longer than expected to return to the country. This means that in certain industries there has been a bidding war for staff with qualifications, and increased efforts in ensuring retention. That said, whilst the wages price index is the highest it’s been in a decade, it is still only at 3.3% being much lower than the inflation rate.
What does increased inflation mean for my business?
It may mean that your profit margins have already been hit hard on the goods and services you provide. Noone enjoys feeling like they are working hard to achieve nothing, and if your expenses have gone up you may already be feeling this. The price of petrol alone may have already cut deep into your margins as you're stuck on the road trying to get your jobs done. So it may seem tempting to just stick your head down and see the work through as quickly as possible.
But by allowing yourself the time to sit back and have a sober investigation into the service your business provides and all the costs involved, you can ensure that you know exactly where you stand and what can be done about it.
Do I have my pricing right?
The balance of trying to find the price point which will achieve the maximum customers with the most profit is not a perfect science, but instead a continual process.
If you haven't analysed your costing and pricing in a while, this period is the perfect time to do so. To ensure not only that you are able to meet your costs with enough profit leftover to justify your efforts, but to re-assess the market and see if you do have the capacity to increase your prices.
If you aren’t sure how to get around analysing the impact of inflation on your business then please reach out to our team. This includes areas like job costing which is a skill that we are happy to help you with. We can work with you to analyse the actual costs - including your time - that goes into your business so you can decide whether you do need to change the way you are doing things.
Keep in mind that our team at BLG are not just here to summarise the past twelve months for you, we're also here to work with you to ensure a positive future. By starting this process now and testing and refining your process, it means when inflation does return to normal you will be well in front of the competition.
BLG Business Advisers are Wollongong Accountants that service right around Australia so we can assist you wherever you are. Take control and talk with us today.