Finance

What Impact Will Global Inflation Have On Businesses?

Allison S Robinson | 25 March 2022 | 2 years ago

why can't we print more money

With global inflation rates currently soaring, this leaves many business owners concerned about how the rise in global inflation will impact their business. This leads many people to ask the same key question: why can’t we print more money? After all, if there was more money in circulation, there would be less businesses struggling and more cash to go around.

In this article, we’ll explore the impact of global inflation on different types of business, as well as discussing whether simply printing more money could be a viable option to solve the challenges of the current financial landscape.

What Is Inflation?

Before we can begin to investigate the impact that inflation has on businesses, we need to have a clear understanding of what inflation is, and what determines the global inflation rate.

Inflation is the rate at which prices rise, in response top the devaluation of currency. As the value of the currency decreases, the price of goods and services increases, as more money is required to represent an equivalent value.

The global inflation rate is calculated by taking the median inflation of 65 different countries. These countries are made up of 25 advanced economies, along with 40 EMDEs (Emerging Market and Developing Economies). When we talk about global inflation, we’re talking about inflation that is occurring in many countries across the world – not necessarily (and probably not) every country of the globe.

What Causes Inflation?

There are many different causes of inflation, and it will usually be a combination of different factors that contribute to the inflation level of a country. Let’s take a look at some of the key causes of inflation.

1.     A Growing Economy

As an economy grows and more people have jobs, they find themselves with more money to spend. This leads to increased spending, putting money back into businesses which use the increased revenue to expand. This in turn creates more jobs, continuing the cycle.

2.     More Money Available

If money is printed by the Bank of England at a faster rate than the economy is growing, this can increase demand. After all, if there is more money to be spent, consumers will find a way to spend it! This increased demand pushes prices up, leading to inflation.

3.     Changes In Exchange Rate

A change in exchange rate will make it cheaper or more expensive to purchase from abroad. For example, if the value of the British Pound decreased, this would mean that imported goods would become more expensive to buy. This results in inflation.

4.     Trading Regulations

Trading regulations are forever changing, and they have a direct impact on inflation. For example, if a country makes it more expensive for a company to import goods, this will result in increased costs and in turn, inflation.

How Does Inflation Affect Businesses

How Does Inflation Affect Businesses?

So, we now know what inflation is, and how global inflation is calculated. But how exactly does this global inflation affect businesses, both in the UK and across the world?

There are two different ways in which a business may be impacted by inflation. Firstly, when global inflation occurs, the price of raw materials will typically increase. This means that a business is forced to pay more to create their goods or to provide their services. Whilst some of this cost will be passed onto the customer through price rises, the business will often absorb part of this cost in an attempt to maintain sales.

Whilst inflation pushes prices up, it doesn’t typically lead to an increase in wages. This means that consumers have less money. As businesses are absorbing some of their increased costs to maintain customers, this means that businesses also have less money to spend. So, both B2C and B2B businesses will notice that their customers have less cash to spend during periods of inflation. This usually leads to a reduction in sales for many businesses.

As costs to the business increase and revenue falls, businesses often quickly notice the effects of inflation. This applies similarly to businesses across the world, who feel the pinch when inflation occurs.

What Type Of Business Will Be Most Impacted By Inflation?

Of course, not all businesses are affected equally by inflation. Whilst some businesses will quickly feel the effects of inflation, others may be less affected. Let’s take a look at how different types of businesses will be impacted by inflation.

Essential Goods And Services

Essential goods and services, such as food, housing and energy are required no matter what is happening across the financial landscape. For this reason, sales of essential goods and services will typically be affected least by global inflation.

Non-Essential Goods And Services

It is the non-essential goods and services that will often be hit the most by inflation. This may include technology, leisure and hospitality. If consumers are paying more for their essential goods, they have less money left over to spend on non-essential purchases, meaning that these businesses are often hit the hardest by inflation.

Luxury Goods And Services

You’d be forgiven for assuming that luxury, high-end brands would be one of the most likely areas of business to suffer when it comes to inflation. However, those brands that have positioned themselves at the top of the market are often impacted less by inflation. This is because they have a higher degree of pricing power, with consumers believing that they are worth the money. This means that if the price of the goods or services in question increases, consumers are often still willing to pay the price.

Consider Apple, for example. No matter how much the price of the latest iPhone increases, consumers will still be queuing outside the door to be able to lay their hands on the product.

Why Can’t We Print More Money?

If global inflation is such a problem, you might be wondering why we can’t simply print more money. After all, if there was more money to go around, prices would drop, and everyone would be able to live more comfortably, right?

You might be surprised to learn that printing more money would simply lead to more inflation. This might leave you scratching your head, wondering how the world could possibly be a worse place with more money in it. But let us explain.

Think for a moment what would happen if you were given more money. You’d spend it, right? But what if everyone was given more money?

If there was more cash circulating in the economy, demand for goods and services would be higher. Whilst the amount of money increases, the goods and services on offer would still stay at the same level. This would cause prices to rise, as demand begins to outweigh supply.

So, whilst printing more money might seem like a good option, it wouldn’t solve any problems, as the cost of goods and services would remain relative to the spare cash circulating in the economy.

Disadvantages Of Inflation

Disadvantages Of Inflation

Inflation is something that the human race has been dealing with for over 2,000 years, since the beginning of currency. So is it really such a problem, or is inflation something that we should simply overlook?

Let’s take a look at some of the problems that come with inflation.

Uncertain Financial Landscape

Inflation is a concern of many business owners. With the cost of raw materials rising and sales revenue falling, this leaves many business owners understandably reluctant to expand. If less organisations are investing, this can further slow the economy, leading to more inflation.

Reduction In Value

As inflation rises, everything naturally begins to cost more, as the value of the currency falls. This means that savings are no longer worth as much as they once were. For example, if we go back to the 1960s, you could have purchased a three bedroom semi-detached house in the Midlands for around £2,000. Fast forward 60 years and £2,000 is unlikely to even get you a car, never mind a house. High rates of inflation can reduce the incentive to save, as interest rates may be low and consumers are aware that their hard-earned money may soon be worth less.

Constantly Changing Prices

Finally, inflation leads to a volatile market. When inflation rates are extremely high, price changes are rapid, meaning that businesses are forced to continuously update their prices to represent the current market rate. This makes it difficult for businesses to make transactions, as well as causing instability in the market.

Which Country Has The Highest Inflation Rate In The World?

It can be difficult to put a name to the country with the highest inflation rate, as the rate of inflation in each country is continuously changing.

However, for the past few years, Venezuela has topped the charts when it comes to inflation. In fact, at certain points, inflation in Venezuela has reached over 1,000,000%. As of January 2022, the inflation rate in Venezuela stood at 1198%. This is compared to around 5.5% in the UK in the same month.

The inflation rate in Venezuela in recent years has been so severe that it is said that many shops have stopped listing prices on goods, as the prices need to change hourly to keep up with inflation. Instead, customers have to ask staff for a current price at the time of purchase.

This type of rapid increase in inflation is known as hyperinflation. This occurs when inflation dramatically increases, usually as a result of government overspending. This could be caused by a war or another crisis that drastically affects the country’s spending.

Is Inflation Bad For The Economy

Is Inflation Bad For The Economy?

Inflation has many disadvantages. This may leave you with the assumption that inflation is a negative concept that should be avoided wherever possible. However, a small amount of inflation is actually necessary for a healthy economy.

Deflation (the opposite of inflation, meaning that prices are falling) often leaves businesses hesitant to expand or invest in their businesses. This can lead to a rise in unemployment, as well as a slowdown in the economy.

However, on the other end of the scale, a high rise in inflation, for example inflation of above 5%, can also be harmful for the economy. This is because households notice vast price increases which do not align with an increase in their wages, meaning that they have less money to spend on non-essential goods and services.

A high level of inflation can also be damaging to businesses, as we have already discussed. The price of raw materials increases which is often partially absorbed by the business, whilst sales decrease as consumers have less money to spend.

So, whilst a small amount of inflation is necessary for a healthy economy, there is a fine line between healthy inflation and excessive inflation.

Does Inflation Come With Risks?

Unfortunately, as with everything in life and business, inflation does come with some risks. If the level of inflation remains high for an extended period of time, this can lead to a phenomenon known as hyperinflation. In the most extreme of cases, this can lead to the entire currency collapsing, as was seen with Zimbabwe in 2009.

Countries typically try to counter inflation by increasing interest rates. This slows the economy, reducing borrowing and increasing saving. However, if interest rates are raised too quickly, this can also lead to a recession, causing further unemployment. So, there is a delicate balance that must be maintained by organisations such as the Bank of England, in order to keep the economy moving healthily.

In Summary

Global inflation is something that impacts every business in the world in one way or another. As inflation increases, the cost of raw materials goes up, whilst the number of customers with money to spare reduces. This means that many businesses will be faced with a reduced revenue at the same time as increased costs.

This may leave business owners asking the question why we can’t just print more money. However, this would lead to inflation rising further, as prices rise to match increased demand. So, whilst it might seem like a promising option, it comes with its own challenges that need to be navigated.

Topic

Finance

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