Effects of inflation on business
Most people think about inflation as a situation of rising prices. However, it is actually the value of money going down. The overall effects of inflation are negative on individuals as well as businesses. When a business is unable to raise prices to offset the effects of inflation, then it might fail to maintain its cash flows in real terms.
Inflation is one of the factors behind business uncertainty. It can be an adverse thing for the business, particularly if it reaches high or even hyperinflation levels. Let’s discuss more details about how inflation affects businesses.
1) Impact on business profit
Price increases allow the business to offset the effects of inflation by increasing the prices of goods and services. Consequently, consumers spend less or stay away during inflationary periods. So, business profit is affected due to lower sales volume.
2) Price changes
Rapid fluctuation in prices of goods and services affects the business adversely. It increases the miscellaneous expense, for instance, expense on printing of new stationery, changing price tags, re-printing of packaging designs.
3) Impact on inventory cost
Rising prices during inflationary periods not only affect the consumers but also businesses. The increase in the price of raw materials, semi-finished and finished goods creates a series of uncertainties. Inflation makes a huge impact on economic order quantity(EOQ). Eventually, inventory management has to face challenges due to price instability.
4) Wage inflation
Businesses with a large number of employees, for instance, supermarkets, are affected by wage inflation. Wage inflation causes due to increasing minimum-wage rate requirements in a particular state, an increase in the cost of more incentives, or high employee- retention rates.
5) Foreign exchange
During the inflationary period, the purchasing power of the dollar value declines, relative to other currencies. When the value of the dollar falls, the costs for international purchases increase.
6) Rising Interest Rates
Interest rates also rise during inflation. In a rising interest-rate environment, most businesses are negatively affected, particularly the stock market. The stocks have always tended to perform badly during periods when inflation is rising and corporate earnings are declining.
7) Impact on investment
When inflation significantly exceeds the federal target, investors lose their confidence in the economy. The new investors particularly feel resistance to enter into the market. It is because of the lower profits and high production costs of goods during inflationary periods.