Studies have found that inflation declined substantially (by an average of 0.9%) in the year leading up to the bottom of worldwide recessions, and it continued to fall even after the recovery began. CEPR reports that inflation fell slower, and for a shorter period, in 2020 than in any of the other four worldwide recessions in the previous 50 years.
With inflation falling, why does the price of doing business rise? Some of the price hikes you’re seeing in your local store may appear to be opportunistic. And in business, there is possibly some of that going on, with suppliers taking advantage of the uncertainty to ‘chance their arm’ with price rises, even if their own prices haven’t yet risen.
However, the reality is that businesses are facing a wave of growing expenses, and it is approaching quickly. Inflation can affect almost every commodity or service, including necessities like housing, food, medical care, and utilities, as well as luxuries like cosmetics, automobiles, and jewelry. Once inflation has spread across an economy, people and companies alike are concerned about the possibility of future inflation.
Inflation: What Causes It?
Inflation has two basic causes: demand-pull and cost-push. Both are to blame for an economy’s general price increase. They do, however, work in various ways. When consumer demand pushes prices higher, this is known as a demand-pull situation. When supplier costs force prices higher, this is known as cost-push.
Demand-pull is the most common reason for price increases. When customer demand for products and services exceeds supply, this is known as oversupply. Producers are unable to keep up with demand. They may not have enough time to create the necessary manufacturing to increase supply. It’s possible that they won’t be able to make it due to a lack of trained staff. Alternatively, the raw resources may be in short supply. Sellers will sell out if they do not boost the price. They quickly recognize that they now have the option of raising prices. If enough people do this, it will cause inflation as a result. People begin to expect inflation when prices rise, resulting in consumers being motivated to spend more now in order to avoid price increases in the future. This increases growth even further. As a result, a little inflation can be beneficial.
Cost-pull inflation only happens when there is a supply shortfall and sufficient demand for the producer to raise prices. On the supply side, there are various factors that influence inflation. Wage inflation, for example, raises pay. It only happens in the absence of active labor unions. A corporation that has the opportunity to form a monopoly contributes to cost-push inflation as well. It is in charge of a product’s or service’s whole supply chain.
Natural disasters can cause damage to production facilities, causing temporary cost-push inflation. After Hurricane Katrina, this is exactly what happened to oil refineries. Natural resource depletion is a growing source of cost-push inflation. Regulation and taxation by the government also decrease supply. Cost-push inflation on imports occurs when a country reduces its currency’s exchange rates. As a result, international items are more expensive than goods produced locally.
What impact will inflation have on businesses?
The first factor that will have an impact on businesses is the cost of inputs. The term “input costs” refers to anything you purchase on a regular basis for your business. This also includes daily costs such as water and electricity. Depending on the industry you work in, your input expenses will vary. If you own a butcher shop, for example, your input costs will include the machinery you utilize and the meat you buy.
The increase in salaries is the next element that will have an influence on businesses. As inflation rises, many governments may impose wage increases on firms. Even if it is not required, employees’ living costs will rise, prompting them to request a raise. The best way to keep employees happy and enhance office morale is to offer them a raise.
The hike in taxes is another factor that should be considered. You’ll have to raise your rates if your costs rise. This means more turnover and, if you’re lucky, increased revenue. The tax rate increases as one’s income rises. Tax is paid in a series of brackets. If your company’s revenue grows, you may be able to move into a higher tax bracket. Unfortunately, you are not truly earning more; inflation is the cause of this. You will, however, end up paying higher taxes unless the government adjusts the tax brackets.
The problem with inflation is that it is practically impossible to predict when the growing cycle of inflation will come to an end. Businesses become more unstable as a result of inflation, which can lead to a lot of worries. As a result, whether inflation continues or not, it is critical for a company to establish future planning. Starting a business or forming an LLC is an exciting venture, but it’s vital for entrepreneurs to prepare for potential obstacles. After all, the business world is subject to the whims of the economy.