Inflationary pressures bite as input, labour costs climb

The soaring demand for goods, which producers have been struggling to meet because of supply chain disruptions and border closures, has pushed input costs to the highest level in a decade, adding thrust to the inflationary pressures in the Australian economy.

There was no respite for businesses grappling with high shipping costs, supply bottlenecks and labour shortages in October, according to National Australia Bank’s monthly business survey.

“Most of us initially thought that the pandemic would bring a demand shock and create a deflationary environment, but supply factors are now outweighing that,” said NAB’s senior economist, Gareth Spence.

“This is creating margin pressures for businesses and constraints on accessing inputs, and the key questions now are, how effectively can businesses pass those costs on to consumers, and how can they meet demand?”

Ongoing disruptions to global supply chains saw purchase cost growth, which includes factors such as transport, storage and distribution, increase 2.7 per cent on a quarterly average basis in October – the highest level since 2008. It was 1.8 per cent in September.

The share of companies reporting availability of materials as a major constraint has surged to 43 per cent over the past year, which is more than 20 percentage points above average levels, and significantly higher than any point in the history of NAB’s quarterly business survey.

Border closures, lockdowns, and testing and isolation requirements have also seen the number of businesses reporting difficulty in finding suitable labour reach levels not seen since the mining boom (2003 to 2013).

Labour cost pressures are concentrated in the wholesale, manufacturing and construction sectors, the survey showed, while almost all sectors are reporting elevated purchase cost growth.

“The retail industry usually finds it hard to pass on price pressures because of the level of competition, but it looks like increased consumer savings and support of household balance sheets have helped businesses pass those cost pressures on,” Mr Spence said.

“But other industries, like wholesale and construction, will struggle to pass those pressures on.”

Rising prices across the economy have already shown signs of weighing on corporate balance sheets in third quarter trading updates.

Domino’s Pizza expressed concern about rising food prices, while poultry group Inghams pointed to increasing feed and transport costs as justification for a potential increase in its chicken nugget and schnitzel prices.

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