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WA survey highlights price pressures and inflation concerns

04 July, 2006

The capacity of WA businesses to absorb cost increases is coming to an end, with many poised to increase their prices during the next quarter.

The results of the latest CCI-BankWest Survey of Business Expectations -WA's longest-running and most comprehensive survey of its kind - show only a third of businesses put up prices during the June quarter, however another 60 per cent are now preparing to do so.

In June, the survey's index of input costs reached its highest level since the costs series began in 1997. The pressures were most marked among manufacturers, where 77 per cent reported costs had risen.

Wages and employment-related overheads have been increasing in line with the ever-growing demand for skills and labour, and now the cost of materials and supplies is on the rise.

Nevertheless, the survey found business confidence in the WA economy at a 10-year high. Nearly 88 per cent of the 440 firms surveyed believed the state economy would stay strong or strengthen during the next 12 months.

All of the survey's indices of operating conditions increased during the June quarter, including turnover and profitability which rebounded in spite of the high cost pressures.

Businesses are currently operating at an average 84 per cent of capacity. More than a quarter are running at 95 per cent or more. Hence, capital spending intentions are at a record high for the third successive quarter. More than 40 per cent expect to hire additional labour during the coming quarter - if they can, that is, in the face of labour shortages that are expected to persist.

Commenting on the results, spokesmen for CCI and BankWest voiced concern at current inflationary pressures and echoed worries expressed by firms participating in the survey about the spectre of another rise in interest rates.

Answering the survey's feature question on interest rates, 59 per cent of businesses believed another rise would take a toll on the state economy. More than 70 per cent of manufacturers said it would affect their operations negatively.

BankWest chief economist Alan Langford said the next two quarterly consumer price index (CPI) reports due in July and October were crucial to the interest rate outlook.

"With headline inflation already at the top of the Reserve Bank's 2-3 per cent medium-term target and underlying inflation hitting 2.75 per cent around six months earlier than expected, another cash rate increase this year is more likely than not to occur," Langford said.

He said the RBA was torn between the imperative to limit the extent of further acceleration in key inflation measures without triggering a sharp drop in house prices or choking business investment, which was holding up the national economy in the face of an ongoing cyclical downturn in housing construction in eastern Australia.

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