The US inflation surge and how it may affect you

For December 2021, the US reported a 7% annual rise in consumer prices, the highest figure observed in nearly four decades.

This spike in inflation is a product of supply and demand disruptions brought on by the pandemic. Due to lockdowns, travel restrictions and staff shortages, supply and production processes have been significantly slowed. At the same time, spending on goods has remained strong, and this combination of strong demand and supply shortages that have ignited the major increase in consumer prices.

In response, the Federal Reserve have planned to enforce three interest rate increases during 2022 to alleviate these inflationary pressures by reducing the money supply.

Why this may affect you

Australian consumer prices may begin to mimic the US inflation surge. Due to ongoing, global price pressures, Australian inflation has been predicted to further increase in 2022, edging closer to the upper end of the reserve bank’s target inflation band. However, the unpredictable and unknown impacts of the current Omicron wave may delay this expected inflation rise as uncertainty lingers.

If inflation persists, the RBA will enforce monetary policy, such as raising interest rates, to combat these effects. The RBA have suggested that interest rates may rise prior to their original timeline of 2024; however, new pressures may cause rates to increase sooner.

How should you respond

High inflation puts upwards pressure on wages so as an employer, you may be required to increase your employee’s salaries. Due to expected inflation and a recent increase in labor competition, it is expected that wage growth may increase up to 3% year-on-year in the second half of the year.

In addition to the expected increased in wages, input supply costs are expected to keep rising.

To remain profitable, it is essential that your business increase product and/or service prices to offset these increased costs.  It often takes time to implement price increases with your customers and we recommend that businesses start planning to increase prices over the coming years. Failing to do this could result in a squeeze on margins with significant impacts to the bottom line.

 

If you would like to further discuss this situation, please call or email us to discuss with a Macro Team member today.