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The Effects of Inflation on Small Businesses



When inflation hits, there is good impact on salaries and house prices. How about for small businesses?


A small increase in inflation could affect capital expenditure and increase the production costs for goods businesses.


The economy can benefit from controlled inflation as a whole. However, it is challenging to maintain this status. The target inflation rate of the Government is set at 2 pc. If it goes beyond this value, then money’s value is significantly reduced for both individuals and businesses.


Bigger companies can easily neutralize the effect of inflation, as it can be offset by its savings. Small companies, on the other hand, cannot easily do this.


High inflation is detrimental to currency exchange rates and can result in an export slump. UK’s rising prices make goods and services uncompetitive globally.


Here are some of the major effects of inflation on small businesses.


Menu costs. These are the costs of altering price lists. During high inflation, firms have to regularly update prices. Companies like Pound/Dollar shops would find high inflation damaging as it becomes more challenging to find goods that can be sold for a pound.


The good news is that modern technology has made changing prices easier compared to previous years. During the past few years, prices have to be changed manually. These days, bar codes can be updated and time is less consuming.


Salary Inflation. Unforeseen inflation may lead to the need of renegotiation regarding deals on salary with employees. The problem is that these salary increases may not be within the financial capability of the firm.


Uncertainty and confusion. The cost of investing needs to be changed frequently if there is unexpected inflation. Companies have less interest to invest because they are uncertain over future demand, wages, and future costs. This situation worsens when there is an unexpected cost push inflation that raises the price of raw material costs. Firms may find this as the biggest cost of inflation as high inflation results in uncertainty and can hamper growth.


International competitiveness. It is not good for a country to have higher inflation compared to other countries. This will make it less competitive compared to global competitors. This is also crucial for exporters.


A higher inflation rate compared to competitors also lead to a depreciation in the exchange rate. Although it might restore competitiveness, it can result in poor living standards and increase the price of imports.


For more information regarding inflation and your business, you can contact our firm.

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