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Is Inflation Always bad for Businesses?

If you’re running a business in 2023, inflation probably has you feeling flat. The European Central Bank explains that “inflation occurs when there is a broad increase in the prices of goods and services, not just of individual items.” Effectively, this means that you get less for your money, because inflation reduces the value of the currency over time.

Due to the increasing cost of energy and the aftermath of Covid’s supply chain disruptions, the UK is experiencing inflation — but is there any way that this could actually spell good news for your trade? It’s a controversial stance to take, but it might just hold water. Let’s unpack what inflation could mean for your business.

The negatives

When discussing the consequences of inflation, there are a number of commonly cited effects that could take hold at your company. These are the risks you need to be aware of.

1.     Increased operational costs

With prices of goods and services on the rise, many of your company’s regular outgoings could be increasing. Depending on your trade, this might be limited to just the weekly tea and coffee order, but chances are, it will have a larger cumulative effect on the services that you use to power your business processes. Tea, yes — expensive subscriptions for IT and office solutions, also yes. And this is going to drive up your operating costs.

Many businesses are fundamentally unable to run without these services. Whether it’s your internet provider, caterer or software vendor, suppliers are well within their rights to increase prices. This is because these service providers typically build price uplift allowances into their terms and conditions.

For example, software purchasing platform Vertice explains that as many as 88% of software vendors (are) including clauses in their contracts that allow them to increase their pricing at any given time. Of course, this saves providers the extra expense — but leaves consumers little choice but to make up for the shortfall.

2.     Decreased consumer demand

As we’ve been reminded in recent years, challenging economic circumstances tend to suppress consumer demand for certain goods and services. With average prices increasing across the board, people generally have reduced disposable income to spread around on non-essential outgoings, saving money for essentials like food, shelter, and gas and electricity, the latter of which has recently skyrocketed in price.

For the average consumer, this might mean fewer trips taken to hospitality venues, less spending on holidays, and cutting back on purchases of luxury tech or significant home furnishings. Currently, the Office for National Statistics reports that the UK is experiencing inflation of around 10.1%, having dropped from 2022’s peak of 11.1%. This high rate has caused demand for industries such as hospitality, home retail, and accommodation to plummet. Ultimately, some sectors will be disproportionately affected by inflation rates, and if your trade operates in one of these industries, you could see profits take a dive.

The positives

On the other hand, inflation can pass some benefits on to select businesses. While impacts will vary, these are the potential advantages of inflation.

1.     Price increase opportunities

As we previously discussed, some lines of business are able to raise their prices and pass on any increased costs that they’re picking up to their customers. And it’s not just those that offer ongoing subscriptions that take the opportunity to raise their prices in line with inflation. If you frequent the same supermarket or hairdresser, you might have noticed announcements of price increases for certain products, following adjustments in line with the rate of inflation.

Businesses that offer essential services or have few competitors have the safest opportunity to increase their prices during inflation. If you’re thinking of increasing your prices, you should always justify this with due notification and a simple explanation of how your costs are going up. Salon solutions outfit Phorest advises that “this honesty will be appreciated both ways and avoids clients feeling like they’ve been blind-sighted by a price increase when they visit the salon.”

However, you shouldn’t exploit this opportunity to gouge prices and charge a large premium, as this runs the risk of alienating a loyal customer base and bringing your company name into disrepute.

2.     Hiring opportunities

When entering an inflationary period, unemployment tends to be low, but as inflation progresses and workers start to feel the sting of tightening purse strings, many begin to leave their jobs. This comes as a result of concerns over rising costs of living, which incentivise many to look elsewhere in search of higher salaries or benefits. Naturally, these are unlikely to be offered by their workplace if the business is going through a downturn.

Later in inflationary periods, the pressure begins to mount to attract competent employees, and many workers will transition between jobs to benefit from the higher demand for talent. According to Forbes, inflation tends to affect commodity-based, essential retail and real estate-related industries the least. As a result, businesses operating in these industries can take advantage of the window of opportunity that comes up when staff are exiting from other trades. These companies will have access to a more diverse pool of potential recruits than usual and use incentives to attract talent to their businesses instead that can’t be offered by those suffering during inflation.

The verdict

Ultimately, whether or not your business benefits from inflation will most likely come down to the industry in which you operate. For those that work in hospitality venues or nonessential retail, inflation may be a challenging time financially. This is due to consumers withdrawing from unnecessary spending and lowering demand, while operational costs continue to rise.

However, businesses operating across commodity-based industries like energy and materials may emerge from inflation in better stead, thanks to opportunities to increase prices and hire from a strong pool of talent transitioning between jobs. In this sense, inflation may not always be bad for business — but it depends largely on the type of trade that you do.

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