Inflation happens when there is more money in circulation than there are goods and services available to purchase. This can greatly impact businesses up and down the nation.
What is Inflation?
Inflation is the rate of increase in prices over a period of time – such as the increase in the cost of living. Ultimately, inflation represents how much more expensive a set of goods has become over time – usually a year.
Cost of living depends on the price of goods and services (such as your weekly food shop) and the government calculates the average consumer’s cost of living to then calculate inflation.
Inflation is always a concern for businesses as it can increase prices and eat into profits.
UK Inflation Rates
In August 2022, the UK inflation rate was 9.4% – meaning, on average, products and services have increased by 1.6% over the past year. In October 2022, annual inflation rates were 11.1%. Inflation is rising for many reasons, but is largely down to money supply and a decrease in production. It’s no surprise that the pandemic is still affecting the country. When there is less of something available (such as petrol), people are willing to pay more for it, meaning prices rise.
Effect On Businesses
Inflation can affect businesses differently, depending on what they offer and how they operate. Businesses selling durable goods may not be affected as much – as they are offering items that consumers don’t purchase as often and therefore prices may not need to increase. Businesses selling non-durable products on the other hand, may need to increase prices to keep up with inflation and the industry.
Additionally, larger businesses can spread the cost of inflation over a larger number of sales, making it easier to absorb the impact.
Implications of Inflation
Inflation may make it difficult for businesses to borrow money and get loans, as lenders factor in the expectation of inflation to set loan rates. This may make it harder for businesses to expand – affecting things such as getting loans for more/bigger locations.
Businesses may find it difficult to maintain profit margins as customers cut back on spending. To tackle this, businesses may increase prices by passing the cost on to consumers. However, customers may not warm to this and could result in loss of customers and therefore revenue.
Opportunities
It’s not all doom and gloom. Inflation also presents a number of opportunities for businesses. If the prices of goods and services are rising faster than wages, businesses may be able to increase their prices without losing customers. This is because people have more money to spend, so increasing prices at the same rate will not leave customers out of pocket.
What’s more, there may be more demand for products that help people cope with rising prices or save money. So, if you’re a business that offers such goods or services, you may find that demand increases.
It is essential for businesses to monitor inflation levels and adjust strategies accordingly. It is also important to keep a review of business bookkeeping to ensure that you are aware of revenue and expenditure, to be able to adjust from there. James & Uzzell are leading accountants and we can help you to get organised. Contact us today to see how we can help you.