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Rising costs are here to stay

The Reserve Bank (RBA) says businesses will feel the pressure of rising labour costs as inflation and higher interest rates reshape the economy. 

4 May 2022 

The RBA’s decision to lift the cash rate to 0.35% reflects the interrelated challenges of rising inflation, supply chain bottlenecks, and acute labour shortages faced by businesses across the country.

In a speech delivered hours after announcing the rate hike, RBA Governor Philip Lowe said there was now stronger upward pressure on labour costs and that this was likely to continue. 

“We expect to see this in the ABS data in the period ahead. In a tight labour market, some firms are paying higher wages to attract and retain staff. This is especially so given that inflation is high and workers are experiencing cost of living pressures,” he said. 

“There is still considerable inertia in the wages system from multi-year enterprise agreements and current public sector wages policies, but the direction of change is now clear.”

ACCI chief executive Andrew McKellar said the RBA’s decision to raise the cash rate for the first time in more than a decade was not only indicative of the building inflationary pressures on the cost of living but also a reminder that the cost of doing business was also increasing.

“The Reserve Bank is independent of the government and must make economic decisions as it sees them. With interest rates at extraordinarily low levels for the past few years, it was expected that the RBA would begin the process of tightening monetary policy,” Mr McKellar said. 

“Having survived the pandemic, small business owners are now confronted with rising input and labour costs, forcing businesses to raise prices or absorb higher costs within already thin margins.

“Congested supply chains, exacerbated by the conflict in Europe and lockdowns in China, are continuing to drive up the cost of everything from washing machines to microchips, with small businesses bearing the brunt of these disruptions.”

Businesses are already facing the worst labour and skill shortages in almost 50 years. The RBA’s forecast that the unemployment rate will further decline to around 3.5% by early 2023 will stretch an already tight labour market.

According to recently released ABS data, 57% of all businesses have had the cost of doing business increase more than usual in the last three months.  As such, Mr McKellar said the overriding priority for the next federal government is to pull all the levers it can to address the supply side constraints that are driving up inflation and holding back the economy.

“Until we see some of those external supply chain problems ease, until we get more workers coming back into the labour force, and until adjustments are made to monetary policy, inflationary pressures are likely to remain for some time,” he said, 

Where prices are rising the most 

Researchers from the University of Queensland have broken down inflation, looking at different groups of expenditure:

  • Transport (which includes petrol) has seen the highest price increases (15.1%), with great variation between capital cities. Hobart (19.5%) has had the highest increase and Sydney (12.7%) the lowest.
  • Housing (8.1%) is the area with the second highest price increases – but with wide variations – from Perth (18.1%) more than double the national average, and then Brisbane (10.2%) – and Melbourne (4.4%) and Sydney (4.5%) the lowest. No doubt these biggest cities remain the most expensive housing locations, but it’s not where prices have risen the most.
  • Education has the third highest price increase (4.9%) with the biggest increases in Darwin (6.7%) and Perth the lowest (3.6%).

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