Inflation up despite Omicron dragging on business confidence
Today’s 1.3% lift in the CPI for the quarter (up 3.5% for the 12 months to the December quarter) shows a substantial rise compared to the September 2021 quarter. This will likely accelerate the upward movement in household and business market interest rates irrespective of when the RBA moves itself to lift the official cash rate.
This coincides with the NAB monthly business findings today too which have revealed how Omicron plunged business confidence in December by 24 points to an index of minus 12 from plus 12 the previous month. This is much lower than when we were in the midst of the Delta strain. It’s all a timely reminder that an economic recovery will happen in 2022, but slower and bumpier than earlier anticipated.
The CreditorWatch monthly Business Risk Index (BRI) highlights a number of industries at risk of default over the next 12 months or who are combating high rates of industry arrears. The construction industry tops the latter list. Notably, the rise in new dwelling prices contributed substantially to the headline inflation rise at the end of last year. That result reflects elevated levels of new home building at the same time as materials and labour shortages began to bite in a strong market.
The RBA faces a conundrum in early 2022. Core inflationary measures are well within the 2-3 per cent mandated band, yet wages growth is lacking considerably. This dynamic will hit discretionary spending and consequently industries already identified by CreditorWatch as high risk. Accommodation and food services and arts and recreation services provide just two examples.
Some inflationary pulse is no bad thing for the Australian economy, lacklustre wages growth is not. What the RBA has to say about that and how SMEs cope with rising market rates in 2022 will be crucial to the profile of a post-Omicron economic recovery.
CreditorWatch Chief Economist