When there is a continuous increase in the price level of goods and services, it is called inflation. It is measured as a change in the annual percentage. Under the period of inflation, the price of all the things keeps rising with time. It means every dollar you have could buy a lesser quantity of goods. Listed below are few ways it affects our business.
How the inflation affects
Reduces purchasing power– Inflation will result in reducing the purchasing power of business or people. What you could have procured earlier with a particular amount of money can be used now to buy a lesser quantity of the same. The price change would be the result of an increase in demand for the product because of the ever-increasing population and at the same time, there is a decrease in the supply of the product. The decrease in supply would be the result of a natural calamity, political unrest and so on.
Encourages investing and spending– The most predictable behavior of all the business enterprise, while there is an inflation, is to buy the goods now rather than planning to buy it later. Cash will be only losing the value in future. Hence it is best to stock up those goods which are predicted to increase the value in future. All the raw materials required for the business for which the price will increase has to be bought in advance.
Results in more inflation– The urge to buy things in advance and invest will result in boosting the inflation. As the business people try to spend as much as possible to lower the time they hold the depreciating currency, it will result in overflow of cash which no one wants. The supply of money exceeds the demand, again the currencies purchasing power falls at a very fast rate.
Cost of borrowing increases– In order to keep a control on the check, the interest rate will be increased. If the interest rates are low, it encourages businesses to take up more loan and in turn increases the spending. If the interest rates are high, it will keep a check on the loan application. The business organization will feel it is best to put money in the bank so that it will be able to earn interest. Hence the increasing of borrowing rate can to an extent keep a check on inflation as the overflow of money in the market will reduce.