How inflation can impact your business and sending money overseas
You may have even seen inflation making news headlines of late.
This generally means Australians are seeing consumer prices go up, the result of several factors, including supply shortages.
Now many manufacturers are struggling to secure resources; restaurants are seeing food import and staff costs costs go up; many businesses are finding it hard to get inventory in on time for the busy season; and with the global supply chain suffering disruptions, the cost of shipping has skyrocketed and those prices are now beginning to be reflected in everyday consumer items.
If you need to send money overseas, you’re likely impacted by this because inflation can affect both the value of currency and the rates of foreign exchange (although it’s just one of several factors involved).
So as a business owner, it’s a good idea to know how interest rates, exchange rates and inflation are connected.
Watching with interest - the exchange rate
Let’s take a quick step back: according to the Reserve Bank, an exchange rate is the value of one currency in terms of another currency, and this matters to Australia's economy because of its influence on trade and financial flows between Australia and the rest of the world.
Changes in exchange rates impact the Australian economy in two main ways:
- a direct effect on the prices of goods and services produced in Australia relative to what’s produced overseas.
- an indirect effect on economic activity and inflation. In short, changes in the prices of goods and services produced domestically and overseas influence decisions about production and consumption.
Things can get a little complicated here but let’s try to keep it short and simple. The lowering of our dollar’s value, or depreciation, means it’s cheaper for foreign currencies to purchase our goods. It also means tourists to Australia can exchange their money for more Aussie dollars. The opposite is true when the AUD’s value rises.
Such dollar movements can impact inflation, too. First, if the local dollar is relatively low to ‘partnering’ countries, the prices of imported goods and services will increase, contributing to inflation. Second, more demand and increasing employment can cause an increase in wages and other costs that are inputs to general production, which may be passed onto prices more generally - which will also contribute to higher inflation.
Should these factors contribute to excessive inflation, the Reserve Bank may need to tighten monetary policy in order to achieve its ‘inflation target’. But in practice, there is typically a lag between an exchange rate movement and its effect on economic activity and inflation.
What’s going on with the dollar right now?
So, you’ve likely been watching the Australian dollar and waiting for a good exchange rate deal, particularly if you run a business. Before the lockdowns in mid-2021, the Australian dollar was at a steady 77 US cents average. But in lockdown it plunged to an average of 72 US cents, which meant that your dollar was not going as far.
This matters because if your money doesn’t go as far and prices of goods continue to go up, it can be a tough situation to manage. However, even if it doesn't look great for the AUD, IMT provider Wise Australia country manager, Tristan Dakin says that the local currency is actually in a better position than others.
Could inflation impact your overseas business?
Back to inflation now. Yes, inflation will always affect international money transfers, for better or worse. But there is no need to panic! The official cash rate is stable and the inflation rate is within target range.
We can use the September quarter consumer price index for a quick comparison, which shows that Australia’s core inflation rate is 2.1%, while by contrast, New Zealand has a 4.9% reading, Germany 4%, and the US and UK had a 5% inflation reading in the last quarter.
As mentioned, Australia has an inflation ‘target’ - to keep consumer price inflation between 2–3%, on average, over time. The inflation target is flexible and allows for temporary fluctuations in inflation above or below the target. Right now the inflation rate is within the desired range.
And, as we alluded to, the interest rate has not changed for a while and has been stuck below 1% for some time now. How should we sum all this up?
Well, according to business-to-business foreign exchange specialist WorldFirst, “Interest rates are an indicator of the health of the economy. If the RBA puts interest rates up, then the Aussie dollar is positive. If the RBA decreases interest rates, the Aussie dollar weakens.”
The RBA cannot predict how other countries will move their own currencies though. So you can only work with the numbers in front of you to handle possible volatility, especially when transferring money.
“When dealing with currency conversion, even a slight difference in the exchange rate can impact the final output of the quoted currency,” says Dakin. “If you find a great rate, start converting to that currency and stash away for future use to overcome exchange rate unpredictability.”
IMT tips for your business
If you are worried about the impact of potential inflation or exchange rates could have on your business, these are some steps you can take to help:
- Stay on top of the latest currency news
- If exchange rates are good, consider a forward contract
- If exchange rates are poor, consider a limit order
- Set up rate alerts for your ideal exchange rate
- Shop around! And keep an eye out for hidden fees.
If you are looking for the best international money transfer providers, check out our 2021 Mozo Expert choice Awards winners. Also, WorldFirst is offering new clients a one-time $500 bonus payment for making a minimum transfer amount of $10,000 AUD or equivalent in another currency until the end of the year.
Scroll down below for a glance of today’s AUD/USD offers or head on over to our business money transfers comparison hub for even more currency pairs.
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