How Does Inflation Affect Business?

The effects of inflation can reinforce the price of bills, travel and commodities. Even the smallest of changes has a knock-on effect for every homeowner, commuter and consumer.

Join Esme Loans as we uncover the economic impact of inflation on businesses, especially SME's.

Inflation is the general increase in price within the economy. Measured by a rising or falling percentage each year, each country has its own inflation rates. The government push the Bank of England to obtain an inflation target of 2-2.5% each year. With a base rate of 2%, the economy learns to accommodate the predicted inflation rate, which occurs each year. The Consumer Prices Index (CPI) is the main estimate of inflation. CPI measures price change, household income, and what consumers are spending their money on.

Small businesses should be attentive, acute and responsive to changes in inflation.

Rising costs for businesses could result in bigger production spends and falling profitability. Therefore, you could be forced to increase your prices. It’s much better to gradually increase your prices, rather than a sudden, larger increase as consumers could respond negatively.

Other costs may also incur from rising prices, for example, if you own a café or a shop, you may need to replace your menus or price tags.

For the consumer, feelings of uncertainty cause for overspending and money hoarding in a time of inflation. Consumers may hold back on spending until they enter a safer economic climate. With consumers holding back, businesses can, unfortunately, feel the brunt of it with a potential reduction of sales. This effect of inflation can be detrimental to business sales and their stability.

If a business prepares for rising inflation rates, the effect on employment will come less of a shock. Raising prices slowly over time eases the consumer into a more expensive economy.

Employee wage expenses can be difficult for businesses to manage during inflation; it can be common for businesses to see a high turnover of staff during this period. If businesses are making less profit as a result of consumers wanting to spend less money, employees may not be entitled to pay rise to match the inflation rise. Inflation has the same effect on employees as it does consumers, and therefore if their pay isn’t as high, they may not be able to afford items they once were able to. Therefore, it’s important to still make your employees feel valued so that they are not forced to look for a better-paid job elsewhere.   There are many strategies to handle inflation. If businesses follow the pattern, gradually increasing their prices to emulate the economy, consumers won't be shocked at a change in price/service. Therefore, customers will be more likely to continue purchasing the product.