This article discusses the effect of the inflation experienced in the current economy post-covid19.
The nation worldwide experiences a sharp increase in prices decreasing the consumers' purchase power, devaluing the currency and the country falls into a recession. While some may think an economic downturn is a negative thing, some inflation effects can be favourable for some.
It is recommended that low inflation rates of up to 2% annually stimulate steady price rises, boosting business profitability.
How can you protect yourself and increase profit in your business?
We'll explore all about inflation, its causes, consequences, parameters measuring it and some steps to counter surging prices. Discovering how inflation affects your investments and giving you pointers to protect yourself against the fallout.
Hence, inflation is the consistent increase in the price level of goods and services, this rise started when Brexit arrived and drop during COVID-19 as the world over went into a pandemic. Now post-covid19.
Inflation is the consistent increase in the price level of goods and services, a broad measure denoting the rise in overall prices affecting the cost of living for a given period. It can be calculated for individual commodities and services.
Inflation affects countries differently and in the USA the inflation rate was 7.9% in 2021, far above the recommended 2% level. However, in the UK, The Consumer Price Index for the United Kingdom is 121.8 for June 2022. The inflation rate year over year is 9.4% (compared to 9.0% for the previous month).
The immediate impact of inflation is a reduction in your purchasing power, affecting the number of goods and services you can buy with a currency unit. As inflation rises, you'll have to spend more to buy the same quantity of products or services, limiting your purchasing power.
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If inflation persists there will be an excess of money supply therefore bank institutions reduce the money circulating in the economy by raising interest rates.
The effect of raising interest rates
Do interest rates encourage saving
Who gets affected the most during the recession
Who profits from the recession and increases profit
In effect, while the poor have to spend more to survive, the rich shore up their profits and earn more, fuelling economic inequality.
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Inflation raises the cost of living
Because the costs of goods and services increase, consumers need to spend a higher % of their income to maintain their current living standards, however, if wages don't undergo a proportionate rise you'll end up spending more even for necessities. However, even if your employer raises your salary during inflation, you're more likely to be pushed into a higher tax bracket depending on the increase. On the other hand, low-income earners are at a disadvantage since the minimum wage does not necessarily rise at the time of inflation
Why inflation occurs
Inflation occurs due to an excessive money supply in the economy. This surplus supply drives greater demand, encouraging more consumer spending. When you spend more on consumer goods and services like our services are necessities for small businesses, startups and SMEs without our services these groups of customers cannot thrive well.
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Therefore moderate inflation rate spurs economic activity and increases the growth rate in the short term. However, if inflation prevails for a long time, countermeasures need to take place such as higher interest rates to curb spending and push back growth.
Debt and inflation
If you are in debt, and currently paying off your loan or mortgage lose value during inflation. However, your wages and salaries increase with inflation. So how does that affect debt repayment? Your effective debt repayment rate decreases if your income rises with growing inflation. While this benefits debtors in the short term, consistently higher price levels drive banks to push up interest rates to safeguard themselves against inflationary pressure. As a result, debtors might struggle to receive credit if inflation persists.
Now, let’s answer some common questions you may have about inflation.
The primary cause of inflation is a variation in the total demand and supply of consumer goods and services in an economy. When demand increases faster than supply, the scarcity of goods and services pushes up prices.
The other factors that affect inflation are:
Changes in monetary policy: Certain policy changes by a nation’s central bank may result in inflation. For instance, the lowering of interest rates by the US Federal Reserve in 2021 increased the money supply leading to a higher cost of goods and services.
Supply chain constraints: A business’s supply chain is the network that delivers goods and services to you. Any bottlenecks or delays in the supply chain can cause a shortage of goods and labour resulting in price hikes.
Cost of doing business: Setting up and maintaining a business includes energy, labour, production, and transportation charges. Any rise in these expenses is passed on to consumers, driving prices up.
Wage-price spiral: As prices increase, workers demand higher wages, leading to further price rises. High inflation pushes up wages again as workers seek higher wages to meet rising costs.
This cyclic process creates a persistent increase in inflationary pressure.
What Are the Different Types of Inflation?
Depending on its cause, inflation can be categorized as:
Cost-push inflation: Cost-push inflation occurs due to rising costs of the production factors. The factors of production include essential inputs such as land, labour, capital, and enterprise needed to produce goods and services. Producers hoping to earn profits pass on these additional costs to consumers, leading to a general increase in the price level. Want to know more get the manual and jump on The Cellar where you get lush than lush strategies and tactics to keep your business profitable for years to come.
Demand-pull inflation: Demand-pull inflation occurs when average demand outpaces average supply. When the demand for commodities or services increases during periods of scarcity, it fuels an economy-wide price hike, resulting in inflation. Currently, in the UK economy, we are experiencing a price hike
Inflation can also be classified based on its rate of increase:
Creeping inflation: Occurs when there are low inflation rates of 3% or less per year
Walking inflation: Occurs when prices rise stays between 3 to 10% per year
Running inflation: Occurs with a rapid price increase of 10 to 20% per year
Hyperinflation: Occurs rarely when prices surge past 50% in a month
Stagflation: Occurs when prices increase happens even with stagnant economic growth
What is deflation and why is it bad
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation increases it.
This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation, a slow-down in the inflation rate, i.e. when inflation declines to a lower rate but is still positive.
Economists generally believe that a sudden deflationary shock is a problem in a modern economy because it increases the real value of debt, especially if the deflation is unexpected. Deflation may also aggravate recessions and lead to a deflationary spiral.
Some economists argue that prolonged deflationary periods are related to the underlying technological progress in an economy because as productivity increases (TFP), the cost of goods decreases.
Deflation usually happens when supply is high (when excess production occurs), when demand is low (when consumption decreases), or when the money supply decreases (sometimes in response to a contraction created from careless investment or a credit crunch) or because of a net capital outflow from the economy. It can also occur due to too much competition and too little market concentration.
In conclusion, this article attempt to give you information about the state of the economy post-COVID-19 and its effect on the economy. However, it is time to boost the economy by purchasing goods and services. Our services are necessary for your business growth and our new payment facility Flexi allows you to view your instalment before you buy, hence allowing you to make an informed decision.
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