An easing in Australia’s inflation rate may not bring the relief small businesses crave, with several underlying measures pointing to continued pressure on already-squeezed margins.
The Australian Bureau of Statistics reports the Consumer Price Index for the 12 months to April has fallen to 4.2 per cent, down from 4.6 per cent in March and beating market expectations of 4.4 per cent. The result comes as Australian small businesses navigate one of the most challenging operating environments in recent memory, with stubbornly high costs, above-inflation wage growth and cash flow difficulties weighing on most sectors.
James Keene, APAC Managing Director at Employment Hero, says the data paints a challenging picture for employers. “Today’s Consumer Price Index figures, while showing some modest cooling to 4.2 per cent, reinforce the considerably difficult operating environment that we are currently in,” he says. “This is continuing to have a flow on effect to households and businesses alike.”
The Headline Number Masks Deeper Price Pressures
Despite the drop in the annual CPI figure, the trimmed mean – which strips out volatile price fluctuations and is the Reserve Bank’s preferred measure of underlying price pressure – has crept higher to 3.4 per cent. This is up from 3.3 per cent in March and remains higher than the RBA’s target band of 2-3 per cent.
Higher transport costs linked to the Middle East conflict continue to impact inflation. While fuel prices fell 7.0 per cent from March to April, that followed a rise of 32.8 per cent in the previous month. “The fall this month includes the halving of the fuel excise on April 1. Automotive fuel prices are still 23.5 per cent higher compared to February and before the impact of the Middle East conflict,’ Sue-Ellen Luke, ABS head of prices statistics, explains.
The ripple effects have now extended from transport businesses into the broader economy. “The impact of higher oil prices has also been seen in products and services with high freight and logistics costs, such as parcel delivery and building materials,” Ms Luke says. “This is reflected in price increases of 12.4 per cent for postal services and 4.7 per cent for new dwelling construction compared to 12 months ago.” Housing costs are the largest contributor to annual inflation, sitting at 6.3 per cent annual growth.
Rising Wages Add Another Cost Layer For Employers
The labour market continues to generate its own set of pressures for businesses trying to manage headcount costs. Employment Hero’s most recent Jobs Report data shows wages rose 1.6 per cent month-on-month in April, the strongest monthly wage growth in 6 months. Annual wage growth of 4.8 per cent is still sitting above the 4.2 per cent headline inflation rate.
“While this is ultimately a positive sign for workers and household incomes, small businesses are now being squeezed from both sides, with both higher labour costs and sustained borrowing pressures at the same time,” Keene says.
The challenge is compounded by three consecutive interest rate hikes this year, which have pushed the cash rate to 4.35 per cent. Higher borrowing costs hit businesses directly through loan repayments and overdraft facilities, and indirectly by dampening the consumer spending that drives SME revenue. Employers carrying business debt are paying significantly more to service it at the same time they are paying more for labour.
“Small businesses are now being asked to absorb rising costs without the relief of lower financing costs or a meaningful easing in demand. That’s putting real pressure on cash flow, margins and hiring confidence across the sector,” Keene says.
SMEs Hope To Be Spared Another Interest Rate Hike
The pressure on Australian enterprises is reflected in new figures from business data provider CreditorWatch, which show late payments have reached their highest level in 6 years. Its April Business Risk Index shows more invoices are slipping beyond 60 days overdue, and the trend is accelerating.
CreditorWatch blames the triple squeeze of higher interest rates and energy costs, persistent inflation and weaker demand, while singling out hospitality, construction and transport as the sectors most likely to experience payment delays from customers and clients.
“The April data shows the business risk story has moved from macro pressure to measurable cash-flow behaviour. We are not seeing a sudden collapse in business conditions, but we are seeing a less forgiving trading environment and the stress is concentrated in sectors central to household spending, supply chains and small business employment,” CreditorWatch CEO Patrick Coghlan says. “Businesses extending credit should be watching customers more closely, acting earlier and using live risk signals rather than waiting for problems to become visible in arrears or payment defaults.”
In the short term, limited relief may be on the horizon as economists now expect the RBA will hold rates steady at its June meeting. But looking further ahead, the end of the temporary fuel excise at the end of June is tipped to push headline CPI back up, and a fourth interest rate hike remains a possibility in August if trimmed mean inflation continues to drift higher.
Keene hopes policymakers will weigh the cumulative impact on small businesses when considering further increases. “In a high-rate environment with rising wage costs, every month without relief is another month of pressure on cash flow, hiring, and growth,” he says. “For the sake of small businesses, we hope that the Reserve Bank takes this into account in next month’s decision, especially if they are considering a fourth rate rise.”
