After many years of absence, inflation and higher interest rates are about to start keeping many small businesses owners up at night again.

As the Reserve Bank of Australia’s Governor Philip Lowe noted in his comments about the April monetary policy decision, inflation has increased sharply in many parts of the world. “Ongoing supply-side problems, Russia’s invasion of Ukraine and strong demand as economies recover from the pandemic are all contributing to the upward pressure on prices.”

He added that inflation had increased in Australia but remained lower than in many other countries. “Higher prices for petrol and other commodities will result in a further lift in inflation over coming quarters.”

The RBA’s board removed its previous references to being willing to be “patient” about inflation – a move that has some top economists predicting the central bank will raise interest rates in June and then again later this year and into next year.

So how can inflation affect your business?

If inflation is too high, it can reduce your’s or your customers’ purchasing power or the real value of money. If prices are increasing faster than customers’ nominal incomes, they will be able to afford fewer goods and services over time.

Employees may also start asking for bigger wage increases to compensate for the effects of higher inflation on their purchasing power. And, with skills shortages abounding, you will want to look after your staff. But higher wage growth can raise your company’s costs at a time when other input costs, such as fuel, are also rising.

This may force you to raise your own prices, cut your margins or even reduce the number of workers you employ.

The RBA says this could result in companies raising their prices more often and consumers spending more time comparing prices. This increases their uncertainty about the economy, which may discourage spending and investment and reduce economic growth.

A country’s international competitiveness may be lowered. “If inflation is higher in one country, then the goods and services it produces will become more expensive compared with other countries (unless its currency depreciates),” the RBA says.

CreditorWatch’s March 2022 Business Risk Index shows how higher inflation has increased the probability of default in some industries, such as food and beverage services, arts and recreation services and transport, postal and warehousing.

“As inflation works through the economy, it is expected that consumers will reduce spending on discretionary items, “explains Anneke Thompson, CreditorWatch chief economist. “Cafés, restaurants and the arts and entertainment sectors are all typically areas where consumers choose to spend less as their discretionary income declines.”

Given the risks to your business, it’s important to be proactive ahead of price rises and to assess ways in which you could reduce costs or change your product mix to suit the market changes. Where can you streamline, automate processes or improve productivity? How could you add more value to your customers and provide better services so they stay with and recommend you? Could you form a partnership with a supplier that helps reduce costs? Does the situation offer any opportunities for innovation?

There are many questions you could ask, but different types of businesses and industries will need to handle the situation differently. So, its best to start talking to your advisers, industry bodies, customers, suppliers and staff to ensure you have solid plans in place.

Most importantly, remember that inflation usually means higher interest rates and borrowing costs.

Contact us to learn more.


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