Over a third of all businesses (38%) anticipate raising the price of their goods or services by more than usual in the next three months, a similar result to March 2022, according to the Australian Bureau of Statistics (ABS).
ABS Head of Industry Statistics, John Shepherd, said: “Most of these businesses were finding that increases in the cost of products and services (92 per cent) and fuel and energy costs (78 per cent) were leading factors for planned price increases.”
The other side
The survey results also showed nearly half (48 per cent) of all businesses have no plans to increase their prices over the next three months. “Of these businesses, nearly half (46 per cent) said it was to retain customers and 46 per cent said they had fixed-price contracts in place.” Mr Shepherd said.
The results also provided information about planned capital expenditure over the next three months. Almost one in five businesses (18 per cent) have planned capital expenditure in May 2022, consistent with findings in May 2021 (17 per cent). Nearly half (48 per cent) of businesses planning capital expenditure indicated it would be higher than what is usual for this time of year, fewer than a year ago when 59 per cent planned for higher expenditure.
The biggest Influencing factors on whether businesses were planning for capital expenditure were uncertainty about the future state of the economy (25 per cent) and supply chain disruptions (23 per cent). Current inflation in Australia, as in much of the rest of the world, is the result of a combination of short-term and long-term factors and concerns about demand and supply.
The Reserve Bank of Australia previously raised the official cash rate for the first time in over 11 years from 0.1 per cent, which it had been at since November 2020, during the height of the Covid pandemic. It was raised to 0.35 per cent, which was higher than expected, and the RBA stated that additional increases were on the way.
Furthermore, the Russian war on Ukraine increased commodity prices significantly above pre-COVID levels. They produce more than one-tenth of the world’s oil and wheat.
By: Yajush Gupta
Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.
To understand the process of determining which price increases are fair and which are not, consider an example. A leading apparel retailer recently received price increases from suppliers for many of its primary brands, each citing the inflationary environment as the reason for the increase. The company wasn’t sure how it should respond.
This retailer needs to determine whether suppliers are passing along an increase that’s in line with inflation’s effect on the supplier’s costs. Although it’s not possible to answer this question exactly, the retailer can at least pressure test the increase by determining if it falls within a fair range.
To do this, it began by identifying the main cost inputs that have the highest level of change, especially in an inflationary environment. In this example, these cost inputs were commodities (such as cotton, polyester, spandex), as well as labor and transportation (such as import costs, shipping, and freight).
Second, it estimated the percentage of the total cost these inputs make up. We would expect that fabric makes up about 50 percent of the total cost of a men’s cotton T-shirt. It’s safe to assume that cotton fiber (which has a commodity index, making its cost relatively easy to research) makes up roughly one-third of the fabric’s cost.
Immediate commercial opportunities to mitigate volatility typically include maximizing spend on existing contracts whose prices aren’t indexed for inflation and requesting clawbacks on unindexed contracts that covered periods when commodity prices fell. Digital and analytics solutions can enhance cleansheet analysis to uncover how much purchases should cost for large parts of company spending, which lets managers quantify the extent to which inflationary pressure should affect supplier prices.
To improve future resilience, supplier collaboration can drive joint efficiencies and potentially help the organization look beyond price and at changes to quality or specifications or at finding ways to use less. Finally, companies can consider ramping up collaboration between pricing and procurement teams to weigh inflation’s possible effects on the prices the company charges its own customers.
The defensive, technical levers to respond to inflation include accelerating value engineering and adjusting batch sizes or order frequency. Reducing SKUs or high-cost features and attributes by modifying specifications is a potential medium-term technical lever that can help improve resilience. Depending on the sector, options to address volatility in the short-to-medium term include optimizing supplier footprints for better control over logistics, cost, tariffs, and inventory.
Longer-term volatility challengers could include strategic inventory stockpiling, relying more on vendor-managed inventory, expanding cross-industry collaboration to share commodity exposures, and partnering through the end-to-end supply chain to derisk certain nodes.
To approach suppliers in high-priority categories, a targeted playbook can help strengthen negotiation strategies, with pressure testing via mock negotiation sessions that anticipate potential supplier counterarguments…
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