Undoubtedly, cash-strapped small businesses are affected by rising prices. What's behind it? The answer: inflation — the increase in prices of goods and services over a period of time. It's a big deal and it's monitored by the Reserve Bank of Australia for the entire country.
The funny thing is, inflation may not impact small businesses equally. Inflation is an imperfect reflection of individual household spending, and accounting for changes in household spending across a nation is a challenge. Also, it's unclear which businesses could benefit from higher prices in relation to their competitors goods and services.
How is inflation measured?
Once a quarter, the Australian Bureau of Statistics (ABS) collects over 100,000 prices and uses them to calculate the consumer price index (CPI). The CPI shows the percentage change per quarter in the prices of a basket of goods and services.
A CPI basket is made up of 11 groups. Each group represents a portion of household spending as follows:
- Housing: 23%
- Food and non-alcoholic beverages: 16%
- Recreation and culture: 13%
- Transport: 11%
- Furnishings, household equipment and services: 9%
- Alcohol and tobacco: 8%
- Health: 6%
- Insurance and financial services: 6%
- Education: 4%
- Clothing and footwear: 3%
- Communications: 2%
The ABS uses data about household spending to determine the 11 groups — and how much a household spends on each group — in the basket. The ABS uses the CPI to monitor the trend in the prices of an individual good (e.g., petrol) or service (e.g., child care) and considers them as part of the whole basket.
Why small businesses should care about inflation but not too much
As with anything as complex as calculating household spending for the entire country, it's worth noting that the CPI is not a perfect measurement of all households. Here are some nuances to the CPI for small businesses to keep in mind:
- CPI uses prices from major cities but not from rural areas.
- CPI doesn't measure differences in spending between individual households.
- Improvements in technology that affect price are difficult to accurately capture.
- Qualitative differences in services aren't easy for the CPI to delineate.
- New products like virtual reality goggles aren't phased into a group in the basket until they've reached most households.
- The weight given to items in a particular group can be affected by substitutions or comparing a higher price item to a lower priced one.
If you are wondering how to incorporate inflation into your company's strategic plan, WMC Accounting specialises in assisting small to medium sized companies with long-term growth. Contact us today to learn more about how we can help.