HOW HIGH INFLATION RATE AFFECTS BUSINESS

• Posted by Evert Chris Dimalanta January 27, 2014 - Filed in Business - 957 views

  

  In economics, inflation is the general increase in prices and fall in the purchasing value of money. Inflation rates vary from year to year and from currency to currency. Inflation rate, which is the percentage change in a general price index calculated as an annualized figure, among business owners is vital to watch out. The rise of price levels would mean decrease in the purchasing power of the consumers. Hence, the purchasing power of money goes down with inflation. High inflation rate is believed to be harmful to an economy because it distorts the purchasing behavior of consumers. When consumers become afraid of the ongoing price increase, they would tend to practice panic buying. This would have a negative impact because it can destabilize the market by creating shortages in supplies. Companies would then increase their prices steadily despite the hassle of printing new price tags, updating their systems and changing the marketing plans. The uncertainties make it hard for companies to prepare their marketing strategies as well as their budget and compensation plan since they are unsure of the costs. The fixed income earners will also suffer due to the decrease in their purchasing ability. As a result, they will demand their employees to increase their wages to cope up with the increase in the prices of commodities. Business owners then have to increase labor costs since the workers need additional money to live on or to resort to downsizing their workforce.

  
  Inflation also affects the international market. When inflation in a certain country is more than that in another country, products being exported from the former will be less attractive compared to the latter. This would spell trade deficit due to less sales. Worse, the confidence and competitive advantage of the country with high inflation rate weakens in the international market.Since firms suffer largely from uncertainties, investment and production activity suffer with it. Inflation potentially increases transaction, production and marketing costs which retard economic development.