With recent times showing an increasing inflation rate in Australia, it has some disruptive effects on businesses that most business owners don’t realise.
According to Statista, Australia has had a 1.61% inflation rate in 2020 and a projected 0.75% inflation rate for 2021. While these are small numbers, inflation can cause big business problems for businesses who don’t know how to handle it.
In this article, we’ll list some of the ways inflation has a disruptive effect on businesses.
Lesser purchasing power from the public
When product prices inflate, the general public has to keep their pockets tight to make their paychecks last. Due to this, people will be more reluctant to spend money on the things they don’t need. Sometimes, they can even be reluctant to buy the things they need because prices are just so high.
Also, even if they aren’t reluctant to spend, people just won’t be able to spend much money on your services and products when they have no purchasing power.
For businesses, this effect can be lessened by slowly raising prices because of foreseeable inflation instead of increasing it all at once.
Higher operational costs
The consumers suffer a lot from inflation, but that doesn’t mean your business is safe from the same struggles they have. To keep your business afloat, you would have to pay for operation costs such as equipment and salaries.
Of course, in the face of inflation, the prices you have to pay for these operational needs can also significantly increase. To avoid it, businesses should be smarter in allocating their resources by only spending money on things vital for the business’ operation.
Furthermore, it’s not a wise decision to stock on items in preparation for another increase in prices during times of inflation. When deflation comes, there’s no chance for these items to be sold for the original price.
When prices for all products are high, and the market has no spending power, businesses are left with their hands tied when talking about investments.
During hard times caused by inflation, investing in new equipment and facilities can be a difficult decision even if the business needs it. It’s because high inflation also increases daily costs for businesses.
Due to this, companies have to be hesitant about making investments as failed investments in difficult economic times can discourage business shareholders.
While businesses can go for loans to fund investments, it can hamper the company’s flexibility in the long term, especially if the economy returns to a good condition.
In times of inflation, companies don’t earn as much as they would during good economic times. It can lead to businesses having a tough time providing wages to every employee on the payroll.
Also, with product price increases, it’s the employees that will suffer more than the company. With increased product prices, their current salary may not be enough to pay for their needs anymore. Proceeding with pay cuts would be great, but no employee will be welcome to such an idea when they can’t even pay for their needs.
Due to this, there’s an increased chance of employees not being motivated enough and not performing well at work, and some may even leave to look for greener pastures elsewhere.
Why should businesses be worried about inflation?
Managing a business without keeping in mind the possible effects of economic inflation is a recipe for disaster. To prepare for inflation, data engineering can help you put your business in a good position even with tough economic times.