‘Material effect’: Omicron fuels inflation fears as businesses hike prices

Philip Lowe says the Omicron outbreak was more inflationary than previous COVID surges.

Philip Lowe says the Omicron outbreak was more inflationary than previous COVID surges. Photo: AAP

Australians are paying more for everything from clothes to burgers after Omicron wreaked havoc on businesses in January, economists say.

And they may yet face further cost increases if there are further COVID outbreaks during winter, as health experts have warned.

New ABS data published on Friday found nearly half of businesses were hit by huge cost increases last month as COVID infections peaked to global highs on a per capita basis, triggering a spate of staff shortages.

Of those firms 42 per cent responded by raising prices, the ABS said.

Economists warn that the price hikes signal higher inflation for households in 2022, particularly across retail purchases, hospitality and home maintenance.

National burger chain Grill’d has already warned prices will rise this year on the back of supply chain disruptions, according to reports this week.

EY senior economist Johnathan McMenamin said the ABS data showed Omicron had a “strong supply side effect on the economy”, by making it harder for businesses to staff their operations and source key products.

“There’s concern inflation is running ahead of some measures of wages growth,” Mr McMenamin said.

“There are a whole number of products, about 30 per cent of the [CPI] basket, that are seeing higher than normal inflation and tend to be quite sticky, so they don’t tend to fall in price.”

The Reserve Bank is keeping a close eye on this inflationary pressure as it works out whether to lift interest rates for the first time since 2011.

Headline inflation rose to 3.5 per cent over the December quarter but is still far below the 21st century highs experienced in nations such as the US.

RBA governor Philip Lowe said last week the RBA will be “patient” and wait to see if inflation eases off later this year before raising rates.

But appearing before a parliamentary committee on Friday, Dr Lowe said that the latest Omicron outbreak was more inflationary than earlier COVID surges because lockdowns weren’t used to contain movement.

It meant consumers were free to go out and spend, supporting demand.

But because businesses paid higher costs to service all these customers due to staff shortages, many increased their prices to maintain margins.

‘Supply side problems’

“If we do have further outbreaks, the effect is mainly going to be on the supply side of the economy,” Dr Lowe said.

“That would mean the supply side problems we currently see are going to take longer to resolve.

“It does have a material effect on the inflation profile if we do have more outbreaks.”

Dr Lowe reiterated his view on Friday that a rate rise in 2022 to contain rising inflation is “plausible” but said no decisions have been made yet.

NAB economists said on Friday that interest rates are set to rise more rapidly as inflation pressures persist through the economy over 2022.

“Inflation is expected to remain high in the near-term as the impact of COVID on supply chains continues to play out,” they said in a note.

As health experts warn of further COVID outbreaks during winter, Mr McMenamin said businesses are likely to increase prices again if similar supply chain disruptions emerge.

Commsec chief economist Craig James said there’s a risk price rises become “entrenched at a higher than desired levels” if central banks, like the RBA, don’t raise rates in response to living with COVID-19 policies.

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