What is Inflation?
Inflation is a term that describes the increase in the cost of services and goods, usually referring to price increases over the course of a year. As inflation increases, the value of money decreases. Inflation also reflects the cost of living in any country in the world.
Inflation affects everything, not just the higher costs of goods or services. It affects the smaller costs that are made up of raw materials, which together make up the larger costs of these goods and services.
What is Causing Inflation Right Now?
In March 2022, the inflation rate reached a 41-year high of 8.5%. Economists point to several causes of the current rate of inflation, including:
- Supply chain disruption
- Increased demand for items – especially those affected by supply chain disruptions during the COVID-19 pandemic
- Increased production costs
- Stimulus or relief packages
The latter points to significantly increased demand for goods and services due to aid policies implemented during the pandemic to keep businesses and families afloat. With supply chain issues at an all-time high over the same period, we are seeing demand far outstripping supply.
How Inflation Affects Small Businesses
As inflation increases the prices of goods, services, labour costs, and even raw materials, it makes it more expensive for you as a small business owner to run your business. Passing these increased costs on to consumers is a common response and a popular way to reduce the need to absorb higher prices and reduce your own bottom line. Raising prices also helps keep cash flow stable as higher inventory costs put a lot of pressure on business owners to meet these new challenges.
- Here are ways inflation can affect your business’s cash flow:
- Smaller profit margins because you pay more for products or goods without adjusting your prices to consumers
- Reduced consumer demand as your customers buy less or look for cheaper alternatives.
- Reduced or changed inventory. You simply don’t have the same or the same number of items to sell.
- Increased employee costs, especially in industries affected by rising energy costs.
- Inflated employee wages cause staff shortages and/or the need to reduce working hours.
Negative Effects of Inflation on Business
A rise in inflation doesn’t just hit businesses financially, it can have a negative impact on supplies, deliveries and even staffing. Small businesses that have employees will also be affected by inflation as rising costs impact wages as well as labour shortages that have been increasing since COVID-19. Other negative impacts of inflation on SMEs include:
- Higher material costs
- Increase in energy prices for daily operating costs
- Higher wholesale prices
- Increase in fuel costs
Generally speaking, this spike in inflation has affected almost all aspects of business, and if you are a small to medium business owner and have to absorb costs from all angles, inflation can be rather negative. It is important to note that inflation is not only negative either, with inflation also bringing opportunities.
Low Inflation Affects Businesses
As we mentioned earlier, when inflation is lower, it encourages people to spend more, which is especially good for smaller consumer businesses because people are more likely to buy now, and save later. Lower inflation can also help smaller businesses with small price increases as they are absorbed into the general economy and people expect to spend a little more.
Lower inflation can also mean a loss for small businesses, as it becomes more difficult to raise the prices of goods when consumers expect them to remain low. For goods businesses, lower inflation means absorbing costs elsewhere, which can have a negative impact on companies.
How Inflation Affects Businesses
Rising inflation causes the cost of living to rise, which has both a positive and a negative impact on businesses. As workers face an increase in living standards, they need wages that can match the increase as well as cover other rising costs such as transportation. Small business owners must also consider increases in import/export, supplies, and general operating costs, as these are all directly affected by inflation.
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