Costs up, customers careful: how inflation is reshaping business in 2026

Inflation is often described from the household side: the price of petrol, the power bill, the weekly shop. For a business it arrives from both directions at once. Costs rise, and the customers who would normally absorb a price increase are under the same pressure. This year that squeeze has become the defining condition for many Australian businesses.

This article looks at what the figures show and at the responses that make the most difference. We cover the causes of this year's inflation and the Reserve Bank's response in a separate article.

Growth in purchase costs at a quarterly rate, against 0.8% for selling prices

2.3%

NAB, August 2026

Increase in minimum award wages from 1 July 2026

4.75%

Fair Work Commission

Companies entering external administration in 2025‑26

14,152

ASIC

The squeeze, in numbers

NAB's monthly business survey is one of the most closely watched gauges of how businesses are faring. In August, business conditions fell to minus 1, the first negative reading in six years and the lowest since August 2020. Profitability dropped to minus 9, a post-pandemic low, and conditions fell in six of the eight industries surveyed, led by construction, mining and manufacturing.

The reason is visible in the cost and price questions. Businesses reported purchase costs rising at a quarterly rate of 2.3%, while the prices they charge rose at a quarterly rate of 0.8%. NAB's head of Australian economics, Gareth Spence, noted that cost growth has run ahead of product prices for almost six months.

Costs are rising almost three times as fast as prices

Growth reported by businesses in August 2026, at a quarterly rate, per cent

1. Purchase costs2.3%
2. Prices businesses charge0.8%

Not every signal is negative. Businesses were still using 82.5% of their capacity in August, and the Reserve Bank's latest statement describes growth in business investment and borrowing as strong. Conditions fell in every state except NSW and Tasmania. But the direction is clear: margins are being squeezed, and the businesses with the least room to absorb it are feeling it first.

Where the costs are coming from

Fuel, insurance and award wages are rising faster than prices overall

Change in selected costs and prices, per cent, over the period shown

1. Automotive fuel, year to August13.5%
2. Household insurance, year to August5.6%
3. Minimum award wages, from 1 July4.75%
4. All consumer prices, year to August4.0%
5. All wages, year to June3.2%
6. Small business default electricity price in NSW, from 1 July−9.0 to −11.3%

Wages. The Fair Work Commission lifted minimum award wages by 4.75% from the first full pay period on or after 1 July 2026, and the national minimum wage is now $26.44 an hour, or $1,004.90 a week. For businesses that pay award rates, such as hospitality, retail and many services, that is a significant rise in one of their largest costs. Across all employees, wages grew 3.2% over the year to June.

Superannuation timing. From 1 July 2026, employers must pay super at the same time as wages, and it must reach the employee's fund within seven business days. The change is to timing: the cash leaves the business sooner than under the old quarterly system, which matters for any business that managed its cash flow around those quarterly payments.

Fuel and freight. Fuel was 13.5% more expensive in August than a year earlier. The rise since mid year has been steeper still: in Sydney, the NRMA's update of 22 September reported regular unleaded averaging 237.8 cents a litre and diesel 286.1 cents, up 85.6 cents and 109.8 cents respectively since 30 June. Diesel moves almost everything a business buys, so the effect reaches well beyond the petrol bowser.

Insurance. Insurance prices in the consumer price index, which tracks household policies, rose 5.6% over the year. It is a reasonable signal for businesses budgeting for their own renewals.

Energy, the exception. Electricity is a rare piece of relief for small businesses. The Australian Energy Regulator's default market offer for small businesses in NSW fell by between 9.0% and 11.3% for flat rate tariffs from 1 July, and by more for some time of use tariffs. Many businesses are on market contracts rather than the default offer, but a lower reference price is a good reason to ask a retailer for a better deal.

Borrowing. With the cash rate at 4.60%, the cost of variable business loans and overdrafts has risen with each increase this year.

Customers are still spending, but carefully

Household spending was 6.8% higher in August than a year earlier, and discretionary spending was 7.2% higher. That sounds healthy until inflation is taken into account. Prices rose 4.0% over the same period, so much of the increase is people paying more for the same things, and spending was flat between July and August.

The national accounts tell a similar story. Household consumption rose 0.4% in the June quarter and 1.8% over the year. Discretionary spending led the quarter, with vehicle purchases accounting for nearly half of the increase, while tourism was weak because of the conflict in the Middle East.

Confidence is low. Consumer sentiment fell to 80.4 in October, and to 67.2 among people surveyed after the September rate rise. In practice, customers become more selective. They come less often, compare prices more, and spend on what they value most.

Who is under most pressure

Business failures remain close to their highest levels.

Company insolvencies remain close to their highest levels

Companies entering external administration or having a controller appointed, by financial year

Show the figures

Period	Companies
2022-23	7,942
2023-24	11,049
2024-25	14,722
2025-26	14,152

The figures count companies entering external administration for the first time. In 2025-26, construction accounted for 3,472 of the 14,152 companies and accommodation and food services for 2,078, together about four in ten. Both industries carry the same combination of risks: fixed costs that cannot easily be cut, wage bills set by awards, and customers or clients who are sensitive to price. A business with those features needs a wider safety margin than one whose costs can move with its sales. Of the total, 3,031 companies used the small business restructuring process, which lets a company propose a plan to its creditors while it keeps trading.

What the squeeze does to one business: an illustration

To show how these increases add up, take an illustrative service business with $1 million of sales a year and a profit of $100,000 before tax, a margin of 10%. Its costs are split in proportions broadly like those of a small hospitality business. We apply this year's published increases to each cost and hold its prices and its customers steady. The business and its figures are an illustration only. They are not the figures of any real business, including House of Pickle Botany, and they are not a benchmark.

Where the extra cost comes from in an illustrative business

Extra cost a year for an illustrative business with $1 million of sales, after this year's published increases, dollars

1. Wages and super$15,700
2. Food, drink and supplies$8,400
3. Rent and outgoings$4,000
4. Other overheads$4,000
5. Interest$3,000
6. Fuel and deliveries$2,700
7. Insurance$1,100
8. Electricity−$2,700
9. Total extra cost$36,200

Here is one way the same business could win back the lost profit, using four moderate steps rather than one large price rise. Figures are rounded to the nearest hundred dollars.

What makes the difference

There is no single answer to a cost squeeze, but the businesses that come through these periods well tend to share a handful of habits.

1. They know their numbers every week, not every quarter. Gross margin by product or service, labour as a share of sales, and cash on hand are the three figures that move first. A weekly view gives an owner time to act.
2. They price with care. Broad price rises push customers away. Targeted increases on items where the value is obvious, combined with holding the price on the products customers compare, protect both margin and trust.
3. They roster to demand. With award wages up 4.75%, matching staff hours to the busy and quiet parts of the day is often worth more than any saving on supplies.
4. They fill the quiet hours. For a venue, an hour of capacity that goes unsold is gone for good. Off peak pricing, programs for groups and memberships turn idle time into revenue. We set out the arithmetic in the economics of an indoor sports venue.
5. They renegotiate before they renew. Energy contracts, insurance, supplier terms and leases all reward an owner who asks early, with alternatives in hand.
6. They protect cash. Super is now due with each pay run, tax obligations do not wait, and lenders respond better to a conversation held early than one held late.
7. They do not cut what customers notice. The quickest way to lose a customer in a downturn is to make the experience worse. The savings should come from the back of house, not the front.

Conclusion

The cost squeeze of 2026 is real, broad and likely to last into 2027. Costs are rising faster than prices, customers are cautious, and industries with high fixed costs, such as construction and hospitality, account for about four in ten company failures. The illustration shows that the squeeze is also manageable for a business that acts early and on several fronts at once: pricing with care, rostering to demand, filling quiet hours and renegotiating what it buys. In our view, the businesses that come through periods like this in good shape are rarely the ones that had the best year before it. They are the ones that knew their numbers and moved first.

Periods like this reward operators who are close to the detail, which is the way we prefer to work. We assume that costs will stay higher for longer than anyone would like, we test every plan against a weaker year, and we pay more attention to the lease and the roster than to the headline revenue. House of Pickle Botany is due to open into these conditions, and the measures in this article are the ones we will be watching from its first week.