Inflation is a significant increase in the price level and it can be caused by various factors. There are mainly two types of inflation and they are:
We will also talk about the other variants of inflation that impact businesses so that entrepreneurs are better prepared for them in future.
When the aggregate demand is relatively faster than the aggregate supply then a demand-pull inflation occurs. This type of inflation is common in a situation where the economy is growing at a faster rate than the trend of growth that is typically assumed. If the demand is higher than the supply, business firms will naturally increase prices. This type of inflation was experienced by the UK in the late 1980s and it is popularly known as the Lawson boom phase.
When the cost of production increases for a business firm then the aggregate supply shifts to the left. This form of inflation is commonly noticed when the prices of commodities and also the price of energy increases. The cost-push inflation is also commonly known as the inflation gone wrong. This is primarily because it is the kind of inflation that is linked with deteriorating standards of living.
Wage push inflation
The kind of inflation that occurs when wages rise, is known as wage-push inflation. This is a combination of cost push and demand pull inflation. Since employees demand higher wages during inflation, this is passed on to the consumers in the form of raised prices.
If the exchange rate depreciates, imports will incur a lot of money. The prices will also increase due to the impact of this exchange rate. Due to the depreciation, exports will become competitive and there will be an increase in demand.
There are other temporary factors that might affect businesses like indirect taxes. If the VAT rate is increased by a certain percentage, the prices of goods and commodities will also increase to an extent. However, this is not permanent.
All these types of inflation could affect a business and make it difficult to run it. All entrepreneurs must be aware of the risks that a business comes along with and should have contingency plans in place to save the business from losses. Losses incurred during inflation can be redeemed when the prices stabilize but if they are way more than what the company can afford then it could cost the very foundation of the business.