Hole in the pocket- inflation

Signs of active and lively business in today’s world depend on the acceptance and application of changes which takes place whether it is demand supply, consumption, workers, changing prices, borrowings. All these make a great impact on the inflation movement. When not balanced and taken proper measures to handle the exchange activity, inflation can actually burn a Hole in the Pocket of any Business.

5 Impacts of economic inflation on business:

  • When inflation occurs, businesses that supply goods or services will increase the prices which are higher on demand relative to its supply, and those who want to purchase will be prepared to pay more which in turn creates Demand-pull inflation scenario. It will affect the consumer purchasing since the cost of the goods or services increases, the demand would decrease.
  • The rise in prices of factors of generation including labor, raw material results in the poor surplus of this commodity. Since the exaction prevails stable, the price of the commodity increases reasoning to increase in the all-around cost zone resulting in Cost-push inflation in business.
  • Inflation rate and inventory turnover go together throughout a business’s tenor. For the better use of resources, a company would expect a low inflation rate and a higher turnover ratio. To derive average unit cost, the total cost of goods in stock is calculated against the total stock available. It’s important to find the right way to switch inventory method for allocating inventory to sales. Especially while inflation is rising, FIFO would work better as inventory purchased at the initially lesser market price would be sold at a rising price providing higher returns. While inflation is at its peak, LIFO would work just better than FIFO as goods purchased at higher prices are sold at peak rates thereby leaving sufficient inventory in hand purchased during initially low prices to be sold at declining prices while inflation corrects.
  • Employee wages that are fixed and the employee on contract base has to be adjusted timely with inflation changes for the business to move smoothly and to encourage the employers which in turn affects the buying power relative to rising prices.
  • Investments and borrowings are the two wheels of any business which generates the monetary requirements. High inflation leads to increased rate of interest and business suffer as they have to pay a higher rate of interest for their borrowings as the risk of loan default is more when inflation rises.

 

 

 

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