What Is Inflation and How Does It Affect Small Business?

May 24, 2022

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What is inflation? Inflation is the increase in prices of things over time. This can span from cost of living to prices of food, cars, gas and anything you might buy as a consumer. Essentially, your dollar will not be able to purchase you as much today as it will tomorrow when inflation happens. When running a small business it is important to know how inflation will affect your company. The prices of your services or products may need to increase in order to keep a positive profit margin. Keep reading to see the positive and negative effects of inflation on your small business.

What is Causing Inflation?

To start off it is important to know what is causing inflation. Inflation is caused by a variety of factors. If consumers have a surplus of cash that they are eagerly spending, prices on goods may go up to appropriately affect the demand. Additionally, a shortage on a good or service can increase prices and result in inflation. The coronavirus has had a huge impact on inflation as production was slowed causing prices to skyrocket.

So what happens when inflation rises? As we discussed above the prices of goods will rise as well. As of 2022, the inflation rate reached the highest it’s ever been and it’s unclear when this will end.

What effect is inflation having right now?

Currently, inflation is directly impacting the supply chain. Demand has returned and users are ready to purchase goods. But what people want to buy cannot be produced quickly enough and production is still hampered from a reduced work force from when COVID-19 first began. This causes inflation to increase. 

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Some are saying inflation is good for the economy

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Even though inflation normally has a negative connotation, some say that it is necessary to drive consumption. Small amounts of inflation drive consumer spending which are a crucial component to economic growth.

Economists consider the actual definition of inflation different from the one we previously discussed. Economists believe that inflation enables supply and demand and is a function of money. This means producing more dollars and making each dollar less valuable forces the general price level to rise. Good for business and for driving the economy.

How does inflation affect small businesses?

Is inflation bad for business? The effects of inflation are primarily detrimental however there are some positives that can come from it. So when you ask yourself “is inflation good or bad?” you may need to delve deeper and examine your business as well.

Negative Effects of Inflation

  • Money loses value. It will cost you more to buy everything when there is inflation. Your money does not go as far.
  • Cost of living increases. Much like the cost of goods, rent and the cost to buy a house will go up. Inflation can even push some people into a higher tax bracket.
  • Exchange rates fluctuate. This will affect trade and increase the cost of goods and products that we get from other countries. Once again, the US dollar will not stretch as far as it once had.
  • Inequality. Inflation harms low income households. The price of everything goes up but salaries and paychecks do not. This further stretches the wealth gap.
  • Increased cost of borrowing money. With a higher inflation rate it will cost more to borrow and there will be more interest when paying these loans back.
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Positive Effects of Inflation

  • Higher asset and or service prices. If you are looking to sell your house or other assets, these prices will be way higher and create a larger profit. Also, if you have a business you will be able to charge more for good and services due to inflation
  • Increased spending and investing. As inflation increases, consumers will be more motivated to spend and invest before inflation rises even more.
  • Better than deflation for businesses. Deflation is harmful to the economy and primarily small businesses. It can increase debt and cause bankruptcy.
  • Reduces effective levels of debt. As incomes increase, debt will be easier to pay off for both business and individuals.
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Journey Payroll & HR is Here to Help

Don’t let inflation get you down, let the positives lift you up. If you need help with your small business in these difficult times, Journey Payroll & HR is here for you. From general questions to HR, payroll, remote onboarding and more we’ve got your business covered. Contact us today and learn about the service we provide. We look forward to speaking with you!

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