How Inflation Rates Affect Your Business

There are many factors that influence the success of a business and one of the most overlooked factors is inflation of prices. Inflation is defined as the increase in the general prices of goods and services in an economy for certain duration of time. During inflation, the cost of living is also increased. Apart from this, the purchasing power of money is decreased. A low inflation rate is good for a nation, while having zero or negative inflation is considered bad. A high inflation, on the other hand, is bad for the economy.

Below are some of the possible effects of high inflation to a business:

1. It affects the income of some individuals.

- High inflation affects residents who have fixed income because they will pay higher rates for the goods and services they usually get even if their income does not increase. Therefore, their purchasing powers are weakened.

2. It causes changes in consumer behavior.

-  High inflation can cause consumers to be afraid of price increases in the market. To counter these, some consumers resort to buying essential products in advance even if they will not be using the products yet. As consumers hoard products and resort to panic buying, it creates destabilization in the markets and causes shortages on some products for those who need it. On the other hand, some consumers also react to inflation by refraining from buying products they usually purchase completely, or by opting to buy products that are cheaper. This can cause some businesses to decrease sales significantly, especially if majority of their regular customers decide to stop patronizing their products.

3. It creates instability.

-  A high inflation period usually causes big changes in the inflation rates, which makes it challenging for industries to foresee what will happen in the future, making it hard to make analyses and reports, as well as making it challenging to gauge the price and returns of the product or services offered by companies. It therefore causes instability and inability to predict business trends accurately, and can also cause industries to lose confidence.

4. It lowers international competitiveness

-  High inflation in a country can also cause a nation to lose its edge to other countries in the world that offers the same products/services but has less inflation rates. This translates to decreased sales for the country with higher inflation rates not just locally, but also across the seas.  A decrease in sales can cause trade deficit.

5. It can cause demand for higher salaries which may cause inflation to worsen.

- During high inflation, unions in various industries may demand for higher salaries to pay for the increased cost of living. Companies that accept these demands can cause the inflation rate to worsen due to an increase in both the price of goods and the salaries paid to employees.

For big industries, inflation is being resolved by raising their prices so that they might offset the company’s expenses for utilities and raw materials. Meanwhile, small industries have a harder time coping with inflation because as recession has already weakened them, increasing prices will only increase their weaknesses.