Rising costs are squeezing business profit margins

Though more than half of firms surveyed for KPMG's Mid-market Pre-Budget Pulse Check study reported ongoing problems recruiting and retaining skilled staff, almost two-thirds of corporates said their margins were being squeezed because of a reduced ability to pass increasing costs through to customers - a jump from last year.

KPMG Australia partner Clive Bird said finding and retaining workers remained a key problem among the 161 firms surveyed, but in the past 12 months this had been surpassed by the challenge from rising business expenses.

"Cost pressures have emerged as inflation has got higher and supply chain issues remain," Mr Bird said. "Some organisations have difficulty fully passing on those costs. Cost and margin pressure has emerged as the new 'issue of the day'."

The majority of the companies included in the survey, a mix of family firms, private organisations and public corporations with a turnover above $10 million, expected to expand over the next three years.

But Mr Bird said the anticipated rate of growth for many was "pretty modest" and 45 per cent were neutral or pessimistic about the outlook.

The result comes as Australian Bureau of Statistics figures are expected to show inflation continued to grow strongly in the March quarter, albeit at a slower pace than in the final quarter of 2022.

Economists at both Westpac and the Commonwealth Bank tip headline inflation to have grown 7 per cent in the first three months of the year, down from 7.8 per cent the previous quarter but still well above the Reserve Bank of Australia's 2 to 3 per cent target band.

Westpac economist Justin Smirk said lower prices for food, clothes, electronics and houses all contributed to the slowdown, offset to some extent by the rising cost of electricity, which is included in the quarterly inflation reading but not the monthly update (due to a quirk in the timing of the release of electricity price data).

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Also adding to living pressures is the rising cost of rent, which Commonwealth Bank's head of Australian economics Gareth Aird expects will jump by 1.8 per cent.

Mr Aird said rent and electricity price increases "are not something the RBA can directly impact through higher interest rates. Indeed, higher interest rates indirectly put upward pressure on rents through less residential construction than otherwise".

Nonetheless, he thinks the Reserve Bank board will hike interest rates when it meets on May 2.

Despite the April rate pause, central bank governor Philip Lowe said "some further tightening of monetary policy may well be needed".

Mr Aird said his tip for underlying inflation (which excludes volatile items like food and fuel) to have increased by 1.4 per cent in the March quarter meant that a May rate hike was "more likely than not".

But, in a brighter outlook for borrowers, the Commonwealth Bank economist thinks the pace of inflation will decline more sharply than the RBA currently anticipates, raising the possibility of interest rate cuts by the end of the year.