There are some excellent economists around who can provide exceptional descriptions of inflation and what causes it and what we can do about it. But who has a week to read and try and understand economists wordy and nerdy tomes? So let me have a go.
Inflation at its worst is totally destructive. Minor inflation can be a useful thing as it tends to slow rises in both the cost of goods and wages, making the economy all very manageable. But runaway inflation is diabolical.
In Australia our inflation has been under control for some time. Those who are old enough will recall the last period of high inflation was during the 1980s, when interest rates pushed up to over 20% in some cases. If you had a mortgage or a business loan at that time, keeping up with constant rises in monthly loan repayments was very challenging indeed.
The damage of rampant inflation can be seen in the experience of other countries. In post WW1 Germany, for example, hyper-inflation destroyed that economy and the damage provided the foundations for the rise of an extreme government in the form of fascism. We have not experienced that thankfully.
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Inflation is triggered by numerous things. In a world where economies are globally connected, modern inflation often occurs as a result of factors that are outside of Australia’s control. The best (worst) reasons are to do with wars and conflicts between major powers that create shortages in goods and in access to capital. The rising cost of petrol in Australia during recent months is a case in point where higher prices were created entirely as a result of worldwide concern about global oil supplies given that Russia — the second biggest oil producer in the world — had engaged in a war with Ukraine.
Other examples include weather events that create food shortages. The recent extreme weather events in eastern Australia, for example, have produced a shortage of fresh fruit and vegetables and driven fresh food prices much higher.
Then there is the impact of a global pandemic which we are still experiencing — no one has yet worked out the long-term impacts on the economy and on inflation of COVID-19. Interestingly, during the early part of the pandemic, and due to the economic responses, we experienced deflation. But that didn’t last long.
The current moderate rise in inflation in Australia is unlikely to be catastrophic, particularly if the Reserve Bank uses its powers in a timely manner to limit any substantial negative impact.
But there is only so much the Reserve Bank can do.
A more likely scenario is that wages will be forced up in response to rises in the general cost of living. Some of that will be justified, but some of it will be due to people not wanting to feel ‘left behind’ or just being greedy. This reinforces the need for those who comment on the economy to be responsible and not create false beliefs and false expectations.
There are other potential influences. Strike action by big unions, as now being demonstrated by rolling strikes by transport workers and teachers in New South Wales, will also force up the cost to the consumer and to governments, which results in increased taxes as state and territory governments respond to union intimidation. We know that ultimately, it is all of us taxpayers that have to pay more to fund these increases and thus the inflation wheel continues to go round.
This scenario can quite quickly become a nasty spiralling cycle.
As mentioned previously, our wages and conditions are in actual fact very high globally. We need to be careful that our worry — or plain greed (found all around, not just with one or two groups) — doesn’t create an inflationary cycle that has a negative impact on our economy to the point of destroying jobs because businesses cannot afford rising wage costs.
What can a business owner do in response rising inflation?
Plan for more frequent rises in the cost of doing business is basically the message. The costs that will increase more often during inflationary periods are, well, all of them — rent, wages, transport, cost of goods, government fees, bank interest and repayments, power, petrol, machinery and so forth.
If you sell products, stay well informed about the costs of goods and raw materials that are used to make the products you sell. If products come from overseas, the monetary exchange rate is a significant risk, as exchange rates tend to be volatile during periods of high inflation. I was once caught up in dramatic fluctuations in the exchange rate between the Australian dollar and the US dollar.
This was when one of my main products was being delivered on a weekly basis while the exchange rate was dropping on a daily basis. Simply put the cost of goods was different when I ordered the product, from when I received the product and from when I paid the end-of-month statement — no fun there.
Most of all, a business needs the courage to increase its own prices during periods of high inflation — an action that doesn’t come easily to most small business owners who often believe they can hold on in the face of rising costs by reducing profit margin. Sadly, many only see the folly of not passing on significant cost increases to their customers when it is too late and either run out of cash or go broke.
The best advice is to seek information from your relevant industry association or from your accountants and certified bookkeepers.
Hopefully inflation will be managed but best to be prepared.
Talk to others, have a plan and consult experts.