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As businesses begin to pick up post-covid-19 lockdowns, prices are also on the rise. As well as that, interest rates are climbing back up and inflation is higher than anticipated. In light of increased costs, how should your business respond? Should your prices be changing in light of rises in inflation? This article will help you understand what CPI is and how you can utilise it to keep your business and its prices responsive to the world around you.
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
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What is CPI and How Does It Work?
CPI stands for the Consumer Price Index. The Australian Bureau of Statistics (ABS) produces and publishes this statistic every quarter (though this may change to a monthly basis soon). The CPI measures household inflation and uses statistics to describe price changes in categories of household items. Many nations around the world produce a CPI, and many businesses reference it to understand how their products should be priced.
It is calculated with reference to a basket of goods and services, accounting for peoples’ expenditures. In Australia, they base the data on the 8 metropolitan cities and where people spend their money. The basket includes things like:
- food and non-alcoholic beverages;
- clothing and footwear;
- housing;
- health;
- transport; and
- recreation and culture, amongst other things.
All of these elements are grouped together and weighted according to their importance. The ABS then calculates how the price of these items has changed from year to year. Finally, they release a percentage that shows the difference between the amounts.
How Can I Use CPI to Adjust My Prices?
As prices of goods and services increase worldwide, it is beneficial to ensure that your prices can do the same. You want to avoid locking yourself into a price that may be more than your costs to deliver your product. This is a particular concern if you run a subscription service where users pay the same amount from month to month.
However, customers or business partners rarely appreciate price increases, though CPI can provide a workable solution for both parties. Since this number is based on real statistical changes from year to year, customers can be assured that your price increases are not arbitrary. Further, it grants you the flexibility to change your prices and remain responsive to economic trends, protecting the ongoing fiscal security of your business.
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How Can I Incorporate This Into My Business?
To make the most of CPI in your context, you can include a price adjustment clause in your terms with customers or contracts with partners. This clause will detail:
- how your prices will increase, for example, automatically or upon review at your discretion;
- what notice will you provide of price adjustments;
- what CPI data will you base this increase on; and
- whether customers can terminate as a result of increased prices.
All of these details are important so you can determine when the price changes will be applicable and how your business will calculate them. This clarity ensures your customers can understand what they will be paying, avoiding potential disputes or misunderstandings.
This will avoid arbitrary price changes, which can cause issues between you and your customers and could also be considered unfair. It also makes the review process for your prices quick and easy, with an easy reference point. Finally, a well-drafted price adjustment clause keeps you and your customers happy, as you both know you are relying on trustworthy sources.
Key Takeaways
The price of goods and services is constantly changing, particularly in light of new economic trends following the pandemic. Therefore, the best way to remain responsive and keep your business secure is to incorporate an ability to adjust your prices. One effective way to do this is through changes according to CPI.
CPi is an established statistic, produced regularly by a reputable source that many businesses and individuals rely on. Incorporating a well-drafted price adjustment clause based on CPI figures is a sensible commercial solution that allows you to change your prices in a fair way, keeping customers on side and your business safe in changing economic times.
If you would like help incorporating a clause like this into your terms and contracts, contact one of our experienced contract lawyers, who can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Currently, the CPI figure is published every quarter with a lag time of one month. This means that the percentage increase relevant to the 30th of June will be published at the end of July.
Economic trends are difficult to predict and it is hard to comment on what is considered standard. However, in light of past statistics, a more standard change between 2012 and 2019 was between 2% to 3%. The recent increases are some of the highest since 1990, which tells us the importance of being responsive to economic trends when you set your prices.
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