Inflation. You’ve definitely heard about it, but do you know what causes it?
Moore Lewis & Partners Director Pam Badke gives us the rundown on what inflation is, and how we got here.
WHAT IS CAUSING INFLATION?
The term inflation refers to prices rising over time. In Australia, inflation has risen to 7.8% – which is Australia’s highest inflation rate since 1990. Many factors have contributed to where the world economy is currently, let’s look at a few below.
COVID
The rise in inflation is partly because of COVID. While most people were struggling financially, the Reserve Bank kept interest rates low. For a lot of people and businesses, this meant extra cash in hand. Accelerated spending resulted in increased demand, which has 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 are 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.
RUSSIA & UKRAINE
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.
Another contributing factor of 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.
EMPLOYMENT
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.
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.
WHAT NEXT?
Since May 2022, the RBA have been raising interest rates to help curb spending. After years of being low and stagnant, as of February 2023, interest rates have now risen nine times. The official cash rate is now 3.35%, 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.
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, look at your spending and see how you can budget according to inflation.
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.
If you need help to keep your head above water in these uncertain times, our team at Moore Lewis would be happy to help! Give our team a call today to chat about options for your personal or business circumstances.
