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See: Tesco boss tells food producers not to pass on depreciation to consumers. In other words, Tesco which has a degree of monopsony buying power is trying to make food manufacturers absorb the input price rises and reduce their profit margins. It is a move that will be popular with consumers and perhaps good advertising for Tesco , but will producers be able to keep absorbing all the input price increases themselves?
Some of the costs of inflation for firms Menu costs. These are the costs of changing price lists. If inflation is high, then firms will have to update prices more regularly. There are costs involved in this. However modern technology makes changing prices much easier than before. Wage Inflation. Unexpected inflation may lead to the necessity of renegotiating wage deals with workers.
However, these wage rises may be expensive for the firm because they cannot afford them. Uncertainty and confusion. If inflation is higher than expected, then the costs of investing will be changing frequently. This makes firms less willing to invest because they are uncertain over future costs, wages and future demand This is particularly a problem with unexpected cost-push inflation raising the price of raw material costs. This is perhaps the biggest cost of inflation for firms — high inflation creates uncertainty and can lead to lower growth.
International Competitiveness. If UK inflation is higher than other countries, then this will make UK firms less competitive than international competitors; this is important for exporters. A higher inflation rate than our competitors will also lead to a depreciation in the exchange rate; this will help to restore competitiveness but at the expense of more expensive imports and a decline in living standards.
Unexpected inflation These costs of inflation will be worse if the inflation is unexpected. Stagflation One of the most problematic types of inflation for firms is cost-push inflation. Benefits of inflation for firms Inflation can be beneficial in some circumstances. Reduces the value of debt. If firms have debt, then inflation may help reduce the real value of debt. This is because, under inflation, nominal revenue will be rising — making it easier to pay off old loans.
In this case, inflation is more desirable than deflation, where the real value of debt will be increasing. Though it also depends on interest rates. If high inflation leads to high-interest rates, then firms with debt will see rising interest rate costs. Strong economic growth usually results in at least a moderate inflation rate. For example, suppose inflation is very low 0. A stimulus to demand will see higher inflation and higher economic growth.
In this case, rising inflation can lead to an increase in profitability for firms. Moderate inflation makes it easier to change relative prices and relative wages.
How does inflation affect the profits of a firm? There is no definitive answer. How firms can try respond to inflation In this period of rising import prices, Tesco threatened to stop stocking products if manufacturers try to pass on higher prices. See: Tesco boss tells food producers not to pass on depreciation to consumers In other words, Tesco which has a degree of monopsony buying power is trying to make food manufacturers absorb the input price rises and reduce their profit margins.
Related UK Inflation stats and graphs Impact of inflation on savers and borrowers. We use cookies on our website to collect relevant data to enhance your visit. Our partners, such as Google use cookies for ad personalization and measurement. However, you may visit "Cookie Settings" to provide a controlled consent. Cookie Settings Close and accept all. Manage consent. Close Privacy Overview This website uses cookies to improve your experience while you navigate through the website.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways Inflation is closely related to interest rates, which can influence exchange rates.
Other factors, such as economic growth, the balance of trade which reflects the level of demand for the country's goods and services , interest rates, and the country's debt level all influence the value of a given currency. The most powerful determiner of value and the exchange rate of a nation's currency is the perceived desirability of that currency. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear.
Investopedia does not include all offers available in the marketplace. Related Articles. Partner Links. Related Terms Managed Currency A managed currency is one whose value and exchange rate are affected by the intervention of a central bank. A fall in exports can trigger negative multiplier and accelerator effects on national income and employment. Business uncertainty : High and volatile inflation is not good for business confidence partly because they cannot be sure of what their costs and prices are likely to be.
This uncertainty might lead to a lower level of capital investment spending. Potential winners from rising inflation Workers with strong wage bargaining power perhaps those who belong to strong trade unions. They can protect their real incomes by bidding for higher wages. Debtors if real interest rates on loans are negative — the real value of debt may fall. Producers if their prices rise faster than costs leading to higher profit margins. Wealthy groups if there is a sustained period of asset price inflation e.
Potential losers from rising inflation Retired people on fixed incomes — inflation cuts the real value of their pensions and other savings. Lenders if real interest rates on loans are negative.
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