Impact of Inflation on Business

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Inflation happens when there is an increased price for products and services. When inflation rises, the monetary value decreases in terms of percentage.

In this scenario, it is not only the people are affected but also the business industry.

Inflation does not only affect small businesses but also large businesses. Obviously, inflation is caused by either demand-pull factors or the cost-push factors. Inflation rises when companies and firms increase the prices of their products and services due to increasing demand. When there is higher demands the prices would surely go up. The demand-pull factor in the event that demands outstrips supply. On the other hand, the cost-push factors happen when there is an increase cost of production. For instance, inflation would rise when the price of raw materials, labor and interest rates increases. In the past years the oil price shows sustained increase thus causes cost-push inflation.

When inflation takes place, small businesses find difficulty in adjusting the price. Likewise, many businesses are hesitant to increase prices due to the prolonged recession. The major impact of inflation on business is the decrease in investment. This is because when inflation rises there is a possibility of lesser returns on capital and the expected demand might fall. That is why to limit inflation the government helps in encouraging investments and develop long-term business. If you want to learn more about inflation you can browse at http://www.ngfl-cymru.org.uk/inflation.pdf.
Other impacts of inflation in business

  • Increase in menu costs

    When inflation raises businesses become aggressive by increasing small price frequently. This is the best strategy instead of making a big jump of increasing the price. One of the businesses that face the challenges of inflation is restaurant. They do not have any choice but to increase small price to cope up the inflation rate. Fortunately, customers are willing to small price to cope up the inflation rate. Fortunately, customers are willing to accept the increase.

  • Raw material costs

    As inflation raises the prices of raw materials is affected. Thus, many business firms are forced to shop for raw materials that are cheaper in price. This scenario also increases the costs to management. To avoid the impact of inflation to business it is ideal to have stock of inventory before the suppliers increase the prices of the raw materials.

  • Increase in management cost

    Another impact of inflation in business is the increase in management cost. This is because it creates salary and wage pressures. In this situation, many businesses are doing negotiations with employees to avoid industrial threat.

    Moreover, inflation also affects the business portfolio depending on the securities you have. However, if your investment is stocks then you have nothing to worry because the earnings and revenue increases along with inflation.

1 Comment

  • 1. rajesh dhawan said on September 11, 2011
    This is the Keynesian explanation of inflation. The true meaning of inflation is explained by the Austrian school of economics. It says inflation is caused by increase in money supply (excessive printing of paper money) by the governments through their central banks (RBI in India). Check www.mises.org for more detailed explanation and its negative effects on businesses.
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