In order for a business to succeed, it is important that its owners understand all the
different factors that could affect them. One of these factors is inflation, which at the
moment is quite prominent in the UK.
It is important for every business to be well aware of what inflation is and whenever the
rate of inflation changes. This is because it measures how much prices for goods and
services increase over time. When inflation is high, consumers cannot buy as much with
their money.
Read on to discover why inflation is rising, how it could affect your business and what you
can do about it.
What Is Inflation?
According to the Bank of England, ‘Inflation is the term we use to describe rising prices.
How quickly prices go up is called the rate of inflation.’ When the rate of inflation is low and
stable, the economy is in a healthy position. The Government’s target for the rate of
inflation is 2%. However, the rate of inflation currently stands at 10.1%, the highest rate in
40 years.
Inflation often encourages spending because consumers prefer to buy goods now rather
than wait. If inflation is too low, consumers are put off spending their money with
businesses. If inflation is too high, businesses find it challenging to set prices due to demand
exceeding supply.
Why Is Inflation Increasing?
Inflation has been increasing ever since the Coronavirus pandemic and the global lockdowns
that were put in place because of it. When the economy began to reopen once lockdowns
were over, the demand for certain goods increased, which therefore put a strain on
businesses and supply chains, leading to price rises.
Another factor that affects inflation is employment. After the pandemic, many people
started changing jobs and this change has led to increasing costs for businesses as well as
higher wages.
A more recent factor is the war in Ukraine, as the penalties, Russia has faced due to this has added further pressure to food and fuel prices.
How Does Inflation Affect Businesses?
Inflation affects businesses of all sizes in a number of ways, and here are just a few of them:
o Disrupted supply chains
o A shortage of raw materials
o Less consumer spending
o Higher employee wages
o Increased competition of market share
o Higher overhead and inventory costs
As well as all the negative effects of inflation, there are also some positive effects. These
include stimulated economic growth, price increases growing revenue, and a reduction in
unemployment.
How Can Business Owners Tackle Inflation?
One way business owners could tackle inflation is by auditing their prices and costs.
Auditing your prices could help you to work out whether increasing your prices will
improve profit margins. By auditing your costs, you will be able to find areas in the business
where you could reduce your expenses.
Does Inflation Affect All Businesses The Same?
Businesses that sell durable goods with a long lifespan, such as cars and electronics, are
normally less affected by inflation than businesses that sell non-durable goods.
Non-durable goods, particularly food and clothing, need to be purchased and replaced more
frequently. Due to this, businesses that sell items such as food often raise their prices so they can stay ahead of inflation.
What Happens When A Business Expects Inflation?
When businesses expect inflation, they will have a better chance of protecting themselves
and the ability to adjust their prices accordingly. They may also invest in assets that are
likely to increase in value, such as buying a property.
Thanks For Reading
Thank you for reading our article on inflation and we hope you have found it useful. If you
liked this blog, take a look at the other ones we have to offer. They cover a wide range of
topics such as business tips and knowledge.