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Most importantly How is this Relationship affecting you! 

Inflation, Wages and Productivity, it’s a push-pull relationship! 

Inflation has surged, prices are rising faster than wages and the measures to counter inflation is hurting many, including Morgagees and Small Business owners. 

Households sinking under the pressure of inflationary cost of living expenses are looking for answers and solutions. What to do, who to turn to!

Small Businesses too are seeking answers on how to survive and thrive during this period.  They are under pressure on many fronts, including;

• With increased cost of goods and supplies how to maintain a profit margin
• Staffing, Wage-price dynamics - responding to demands 

 Inflation affects every area of Small Business, your Business, from the rising price of goods and services to how much your overheads cost, such as rent., to how much customers will pay for your products.  

But, don’t be disheartened, there are answers, ways to meeting these inflationary challenges. Create your healthier relationship with the following!

 4 Ways to Survive and Thrive during inflation:

1. Get your pricing right: Be fair when setting your prices. Customers don’t want to be ripped off. Pricing should reflect the value and quality of products. Adapt your prices as needed to reflect the changed economic conditions. Avoid over or under-pricing. You need to maintain a reasonable profit margin to survive. 

2. Reward your Employees: Reward your staff with fair wages and incentives.  Be creative. Staff will show appreciation with their contribution and extra effort. Encourage upskilling as growth opportunities if ‘monetary’ bonuses aren't an option.

3. Keep on top of your cashflow: Cashflow is the lifeline of your Business. It’s critical to stay on top of what’s going out and coming in. Adopt processes and systems to issue invoices quickly and offer automated payment options. Closely monitor and manage your debtors ledger to get timely payments.

4. Rework your Business Strategy: With changed circumstances now is the time to review, rethink and rework your Business Strategy. Be creative, look at what has changed and what opportunities it brings. Be progressive, consider what technological improvements may be possible and rethink, and look at new ways of doing Business.  Going forward, adapt your Business model to the current economic environment.

What created this situation! 

The high inflation we are experiencing is the fallout of the COVID pandemic and Ukraine conflict. These events interrupted supply in the global economy pushing up prices and costs. Along with this the fiscal and monetary policy responses to the pandemic underpinned a strong recovery in demand that also pushed up prices. In essence the ‘push pull’ of supply and demand!

How do we bring inflation down? 

The Reserve Bank of Australia is responsible for setting the official cash rate, which is the main interest rate. Rates are set by reviewing economic circumstances, data and other indicators such as employment levels. According to Reserve Bank Governor Philip Lowe in his keynote address on 8 March 2023, the ‘RBA’s job, as Australia’s central bank, is to deliver low and stable inflation’. To combat high inflation the RBA uses increases in interest rates to dampen consumer spending. It redirects your income to servicing debt, and less disposable income has the flow-on effect to counter particularly discretionary spending. 

Other  

The upside of the pandemic fallout has been the improvement in Australia’s labour market, that is, a low unemployment rate, around 3½%, last seen in 1974. The participation rate has increased and the share of working-age Australians with a job has never been higher than recently.

What's the answer!

• Increase wages to help cost of living! 

Record wages growth deflated by Inflation. As reported 18th May, figures from the ABS show wages increased over the past year by 3.7%, the highest annual growth in nearly 11 years. This, however, was offset by inflation still at 7%, which saw real wages decline.

• Calls to increase the minimum wage have been met with mixed responses. Reported in the Financial Review (15th May), Retail and Hospitality employers have warned that a 7% inflation linked minimum wage will cause loss of jobs and drive-up prices, potentially forcing the RBA to further raise interest rates. This argues ‘the government should make clear that wage restraint right now has an important role in keeping unemployment at around 4%.’

Others see it differently. According to new research from the Centre for Future Work at the Australia Institute reveals that ‘rises in the minimum wage have almost no impact on inflation and given the collapse in the value of the minimum wage in real terms over the past two years, a 7% increase is necessary recompense for Australia’s lowest paid workers’.

• Productivity 

Productivity is a measure of the rate at which output of goods and services are produced per unit of input (labour, capital, raw materials, etc.). It has a crucial role in managing wage inflation. Increasing productivity is vital to offsetting wage inflation.

According to Treasurer Dr Chalmers in his recent speech, ‘In the medium and longer term, our success will be determined by whether or not we can lift living standards, and that will be determined, in turn, by whether we can put the woeful productivity performance we saw during the wasted decade behind us.’ (at the Economic Development of Australia event, Brisbane.) 

 Revisiting the past 

In looking at the past, if nothing else, it simply reflects a variety of factors affecting the dynamics of most advanced economies. ‘Supply shocks’ is an example, the supply disruptions we experienced with the COVID pandemic and with the Ukraine conflict.

Other examples include

• the Global financial crisis when afterwards oil prices rose to persistently high levels and following the 2016 Brexit referendum came a considerable depreciation in the British pound. 
• In 1970 most advanced economies experienced a wage-price spiral, known as the Great Inflation. This resulted from political instability in the Middle East causing two severe oil price shocks pushed inflation to elevated levels. It reached 5.5% in 1970, then continued to trend up in a range from 5.5–14.4% throughout the 1970s.
• Reserve Bank of Australia (RBA) Inflation Calculator: This tool calculates the change in cost of purchasing a representative ‘basket of goods and services’ over a period of time. For example, it may show that items costing $10 in 1970 cost $26.93 in 1980 and $58.71 in 1990. (Note: The results produced by the Inflation Calculator are intended as guides only and should not be regarded as 'official' Reserve Bank calculations. https://www.rba.gov.au/calculator/)

Current Key factors

• Prices and wages usually move together but supply disruptions such as brought on by COVID and the Ukraine conflict resulted in prices rising faster than wages. In monetary terms, households have diminished buying power.
• Continued strong consumer demand post COVID, labour shortages and supply chain interruptions created rapid inflation, the highest in 30 years.
• Getting wages growth under control is vital to getting inflation back within the longer term 2 to 3% range by 2025.