Effects of Inflation on Businesses

By Abhishek Narula

Inflation 

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time.When we think of inflation we usually think of how it affects us as consumers. But the effects of inflation are wide ranging, including not only individuals but also businesses and even countries. Consumers and businesses alike have to deal with the impact of inflation, both good and bad. Here are some ways in which inflation affects businesses:

Consumer Purchasing

This is the most obvious impact to businesses.Rapidly rising prices will cause consumers to "stay away in droves". There are ways for businesses to plan of inflation to reduce the chances of revenue loss.Gradually increasing prices will prevent a sudden price hike, and if your competitors don’t respond similarly, they’ll have to increase their own prices suddenly, which will cause “sticker shock” for their consumers causing them to look for more affordable alternatives.

Inventory Costs

Rapidly rising prices not only affect the price consumers pay, they also affect the cost businesses have to pay for materials and inventory. When replacement inventory costs more than the inventory you just sold, it can lead to inventory shortages. 

Price changes 

When service and product prices fluctuate, businesses have to spend money printing new menus or changing price tags to list the correct prices. These costs are called ‘menu costs’, and they affect brick and mortar businesses most heavily. Imagine the labor involved in going through Walmart and changing all the price tags! And then imagine having to do that every day. In an effort to reduce the labor involved in changing prices in the 1970’s large department stores stopped putting tags on individual items and only put them on shelves instead.