What are the causes and effects of inflation?
Inflation can be described as a persistent increase in the general level of prices. ‘Persistent’ is an essential feature of inflation that describes- “it occurs over several periods” whereas “General’ is another feature that tells- “inflation occurs throughout the economy with the prices of many items rising in the same period.”
That said, no one seems to know what causes inflation even though it increases consistently every year. This is very alarming. So what are your strategies for inflation risk mitigation? If you are not sure, continue reading! This article talks about the causes and effects of inflation to help you find the best strategies for fighting inflation.
Three leading causes of inflation are as follows:
Demand Vs. Supply is a very common equation that works wonders when the equation equals one. If one has more money, the desire to buy more and spend more will automatically rise.
But in case of the demand increases and supply is restricted, then the economy would experience a tough time because it would fail to meet the demands of one and all. This issue often becomes a challenge for both the economy and the people when there is excessive money.
The increased cost of production
Every business firm and company is established with a desire to earn profits. When the cost of production increases, companies tend to increase the cost price of products to cope with the rise.
In such a scenario, if the cost of raw materials or machinery increases, the overall production cost would undoubtedly increase. This also holds if the cost of labor increases. This increase in production cost ends up adding a heavy price tag to the final product, eventually putting the entire burden of inflation on the consumers.
Depreciation in exchange rates causes imports to increase and the price of export to decrease. Any imported item would come with a heavy price tag, and then the product would move in its business cycle until it reaches the final consumer.
Finally, when the product goes to the buyer, they are pressured with the heavy price that covers all the costs of the manufacturer, dealer, distributor, wholesaler, and even the price paid for importing the product to the country.
High inflation rates can have serious economic, social, and political consequences. Some of them are:● Inflation tends to redistribute income from low-income groups to higher-income groups because low-income groups have fewer tangible assets like property, which might increase in price, and are in jobs where it is difficult to get a pay rise to help offset the effects of inflation.● People lose faith in the currency as a store of value and often borrow as much as possible to invest in ‘real’ assets like gold, houses, and antiques, the price of which tends to rise faster than the general inflation rate.● If the present rate of inflation in a country is greater than those of its major trading partners, the ability of that country to compete on world markets is damaged.● Forecasts of the rate of return on capital investments become unreliable, making businesses unwilling to undertake long-term projects. Because of this, future living standards may not be as high as they would have been.● A high inflation rate leads to a higher interest rate.
A robust operational and financial strategy for inflation risk mitigation is a must-have, no matter what industry you belong to. Specific inflation risk mitigating strategies include- revisiting your financial roadmap, establishing a broad array of mitigation forces, working with your suppliers to discover solutions, and more.
So what do you think? Which method will work best for you to tackle the impacts of inflation on your business? The decision is in your hand. You can also partner with the leading procurement intelligence and supplier compliance solution provider to aid you through the process.