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Remember when everyone was talking about masks and vaccines? How times change…
In 2022, discussions around the water cooler where focused on the cost of living and how lettuce seemingly went from $2 to $10 overnight. That’s not to mention jaw-droppingly high fuel prices and every supplier getting in touch to say they are about to start charging more money.
If you’re scratching your head over the bills coming in, here’s a look at what is going on:
What is causing inflation?
The term inflation refers to prices rising over time.
In Australia, inflation has risen to 7.8 per cent – which is Australia highest inflation rate since 1990.
This is partly because of COVID. While everyone was struggling financially, the Reserve Bank kept interest rates low. For a lot of people and businesses, this meant extra cash in hand. Ramped-up spending resulted in increased demand, which led to higher prices.
The other factor has been supply chain issues caused by COVID. Only now is China rolling back their zero-COVID policies including mass lockdowns and international travel bans, which means there is still backlogs in the production, processing, and shipping of many goods. Thousands of cargo ship containers have ended up either stranded in China or stuck in places around the world without ships to transport them back to their ‘home base’.
Because of this, the price of sending goods around the world has increased. There comes a point where businesses are no longer able to absorb costs so they must start charging their customers more.
The other issue putting pressure on the global supply chain is political unrest between Russia and Ukraine. Moscow’s invasion of Ukraine has led to sanctions against the Russian Federation. This has resulted in limited availability of oil from Russia, which is the world’s second largest producer of the product. The world relies on oil and therefore the price of fuel and heating has risen dramatically. Again, it leads to people raising their prices, so they can afford to buy the things they need.
Another contributing factor of lingering increased fuel prices is that during COVID nobody was travelling, which saw production be scaled back. It’s not as simple as an off/on switch and it is taking a while to ramp back up again to meet demand. Hence the higher prices.
With all this pressure, it’s easy to see why inflation has taken such a dramatic up-turn.
Employment issues
The other challenges Australian businesses are facing is the 50-year low unemployment rate.
While it is great to have so few people out of work, the lack of migrant and student workers caused by COVID means finding staff is very difficult for employers.
The September 2022 employment summit was held by the Government to try to figure out how to get more people ‘on the job’ and there were several new incentives announced around flexible work and migration. In the meantime, skilled workers are able to charge a premium for their services.
To add to this, the cost of the employee superannuation guarantee rose in July 2022, which means employers now have to pay their workers 10.5% of their wage as superannuation.
Higher demand from workers combined with the need to pay higher rates just to get people in the door is adding to pressure for business owners.
How to keep your head above water in 2023
The RBA since May 2022 have been raising interest rates to help curb spending. After years of being low and stagnant, as of January 2023, interest rates have now risen eight times. The official cash rate is now 3.10%, which is a significant difference from where it was sitting in January 2022 (0.1%). The result of higher interest rates is higher loan repayments, which puts people, businesses, and consumers under pressure. This makes it an important time to review your current loans, reach out to your bank or finance broker to see if there is a better interest or loan terms that may help you save money.
Before things slip too far, it is important to take a moment to review your expenses and consider changing the way you charge your customers. This will ultimately ensure you have sufficient cash flow to cover fixed expenses and tax bills as well as preventing you from having large creditors balances.
Forecasting and budgeting are also more important than ever. You need to figure out how much of an impact the changing economic environment will have on your business and how you can adapt to it.
Need help to weather the cost of the living storm? Reach out to the experts at Crest Accountants today.
Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.
Updated on 25 January 2023.
