SMEs Are Still ‘Copping It’ On The Inflation Front

Higher-than-expected July inflation figures have dashed the hopes of small and medium business owners waiting desperately for price relief, while raising the prospect of further interest rate hikes.

Inflation in Australia has dipped to its lowest level since before the start of the Iran war but small and medium businesses are being warned it’s not yet time to celebrate, as price pressures linger and forecasts firm for another interest rate rise.

The Australian Bureau of Statistics has revealed the Consumer Price Index has fallen to 3.5 per cent in July, down from 3.8 per cent in June. But this exceeds economists’ expectations, with major banks having predicted a 3.2 to 3.3 per cent rise.

The result suggests the Reserve Bank’s efforts to curb inflation through higher interest rates are working, but not fast enough to reduce the need for further hikes. For SMEs, it means even though costs are rising less rapidly, they are still increasing and budgets will remain under pressure for the foreseeable future.

“Small businesses are copping it from all angles right now,” says Employment Hero CEO and Co-founder Ben Thompson. “Costs are up, red tape keeps piling on and there’s no sign of relief coming.”

Uncomfortable Trends Exist Beneath The Headline Inflation Figure

Some of the credit for the July decrease in the headline figure is a matter of mathematics, as an unusually large CPI result from July last year drops out of annual calculations.

The trimmed mean, which strips out volatile price fluctuations, remains at 3.6 per cent for the third month in a row, defying predictions it would drop to 3.5 per cent. This is the number that most influences the RBA in its interest rate decisions, and it is significant that it continues to sit well above the bank’s target band of 2-3 per cent. The monthly CPI figures are also higher, up 0.6 per cent seasonally adjusted, which economists regard as heading in the wrong direction.

Housing was the biggest contributor to annual inflation in July. “Housing rose by 5.0 per cent in the 12 months to July due to rising costs for new dwellings,” says Rachael McCririck, ABS head of price statistics. “New dwellings prices rose 5.7 per cent in the 12 months to July as builders passed on higher costs for materials and labour.”

Food and non-alcoholic beverages are also more expensive. The ABS attributes the 3.2 per cent jump to higher operating and ingredient costs, along with increased input costs following the 1 July hike in minimum wages. The cost of recreation and culture is up 2.6 per cent annually, while the higher monthly figure includes a 6.2 per cent increase in domestic travel prices during school holidays.

Also of note in monthly data, fuel prices are up 7.5 per cent in July after a three-month reprieve, as a result of the unwinding of the federal government’s fuel excise relief plus higher global oil prices.

Why The RBA’s Caution Matters For Hiring And Borrowing

The RBA was unanimous in keeping interest rates on hold at its August meeting but more detailed notes on its deliberations, released this week, reveal some board members believe more rate rises will be required to combat sticky inflation.

Leading economists believe there is now an increased chance of a rate rise at the RBA’s September or November meeting. ANZ predicts a 0.25 per cent increase in November, interpreting consumer spending on meals and holidays as signs activity is not softening as quickly as the RBA would like. KPMG’s chief economist, Brendan Rynne, told The Guardian the nation would be in for “a long, costly grind to get inflation under control” without further intervention, while AMP Chief Economist Shane Oliver referred to today’s figure as “way too high” and suggested on X the Bank would hike again, possibly in September but most likely in November.

With the cash rate currently sitting at 4.35 per cent, further hikes would increase borrowing costs for small and medium businesses while also reducing the purchasing power of their customers. This may add to uncertainty around hiring, which has already slowed in recent months.

“Headcount in small and medium businesses fell 0.1 per cent in July, the weakest monthly result in 13 months, while casual employment dropped 0.7 per cent,” says Thompson, citing Jobs Report data drawn from thousands of SMEs. “While the headline inflation numbers move month to month, our real-time data shows the real impact on people.”

One factor that could encourage the RBA to hold on interest rates at its September meeting is unemployment data reflecting a cooler labour market. The unemployment rate ticked up by 0.1 per cent in July to 4.5, while wage growth remains patchy but generally below the CPI.

The Productivity Question Small Businesses Cannot Avoid

Today’s CPI figure will frustrate small business owners who have spent the year in a holding pattern, waiting for prices to decrease, but Thompson says there are bigger issues at play. “The real challenge isn’t just managing costs,” he explains, “it’s whether small businesses can lift productivity enough to grow, pay better wages and protect margins without simply passing higher costs on to customers.”

The need for higher productivity has been echoed in a recent address by NAB CEO Andrew Irvine in which he urged businesses and policymakers to make productivity the nation’s top priority. “Without urgent action, we’ll be locked in a slow lane, sitting in the rear-view mirror of other advanced economies surging ahead,” he says. “Is Australia prepared to do what it takes to realise our nation’s ambition?”

Australian Industry Group CEO Innes Willox describes Australia’s productivity as ‘woeful.’ “Inflation is too high because the economy is at its productive limits, and even modest growth triggers an inflationary spike. Without a return to productivity growth Australia will continue to labour with high inflation, high rates and ultimately a faltering labour market,” he says.

Thompson says the SMEs that are boosting productivity in the current climate aren’t doing it by cutting staff or raising prices. “They’re using AI to do more with what they have. Less time on admin, faster decisions, better visibility over their costs,” he says. “AI agents are capable of carrying much of that load, freeing up small business owners to focus on growth rather than just keeping the lights on.”

He argues there’s a role for governments to play in expanding take-up of the technology and removing roadblocks. “The tools exist. The businesses ready to use them exist. What Australia needs to do now is get serious about accelerating AI adoption, not adding to the red tape that’s already holding small businesses back,” he says.