The Impact of Inflation on Daily Life: How Rising Prices Affect Consumers and Businesses

By Ryla Raj

Inflation measures how much more expensive a set of goods and services has become over a certain period of time. Inflation is more than often caused by higher wages, increases in jobs and an increase in household incomes. This often leads to an arise in consumer spending, further increasing aggregate demand and the scope for firms to increase the price of their goods and services. While this is a normal part of any economy, excessive inflation can have serious consequences for consumers, businesses, and the broader economy. Moreover, the recent surge in inflation rates globally has started conversations around its impact on both businesses and households' daily lives. With the price increase of consumer goods and factors of production due to inflation, this article will explore how this affects daily lives.

Consumers and inflation 

In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of the majority of consumers. This can be due to a number of factors that are being influenced by inflation. When inflation increases, consumers often struggle to make ends meet with their available budget. This may be due to a reduction in their income because of the fluctuations in the job market, or an increase in their expenditures, which could be due to several factors, one of them being rising prices for their consumption bundle. In addition to this, inflation for consumers is most often felt at either the checkout counter or gas station. The cost of everyday goods such as food, gas, utilities, and clothing tends to rise as inflation increases. Similarly, the cost of fuel can also rise rapidly, increasing the amount consumers spend on transport. This is presented in the inflation of crude oil per barrel - $10 a barrel in March 2020, rose to more than $80 a barrel in October 2021. 

Inflation on business operations 

Inflation can affect businesses in numerous different ways; however, depending on the industry, it may not always be negative. Firstly, inflation often leads to an increase in the prices of goods and services. This causes an increase in the cost of raw materials, production, and operating expenses for businesses. Companies pay an increased amount for supplies, energy, land, and labor, potentially decreasing their profit margins. In many cases, this often leads businesses to take loans or shut down permanently due to bankruptcy. Inflation also puts pressure on businesses to increase company wages as the cost of living rises. Higher wages can also contribute to increased labor costs for businesses. if this is not implemented, many laborers may either leave or be unhappy with the business. Furthermore, it often affects consumer demand as well. With an increase in living costs, consumers' purchasing power may decrease when prices rise. This is due to the fact that consumers have less disposable income, leading to reduced spending on non-essential goods and services. This largely affects businesses that rely on consumer spending, such as retailers, restaurants, and leisure companies. This was present during the pandemic when Businesses reduced their active employment by 39% and 54% of firms were closed.

Future prospects can also affect businesses in regard to investments and potential expansions. Inflation can influence businesses' investment decisions as uncertainty about future inflation rates and economic conditions may lead businesses to delay or scale back on investment projects. This, as a result, may also affect contractual agreements between businesses and their suppliers, as if inflation exceeds potential expectations, the respective parties may not be able to afford the agreed amount. Furthermore, if a business is international currency exchange rates is also impacted and influenced by inflation. This can affect businesses engaged in international trade or exposed to currency risk.

Overall, the rate of inflation in current-day and age societies provides both negative and positive externalities to all individuals involved - societies, businesses and governments. It leads to factors influencing purchasing power, operational costs and economic stability. As prices rise, consumers face increased costs for both luxury and essential goods and services, potentially lowering demand and thereby decreasing their standard of living. Businesses, in turn, struggle with paying an increase in wages, factors of production and facing an overall decline in profits. While moderate inflation is an expected normal aspect of economic development in societies, excessive inflation can create financial uncertainty and disrupt financial markets for both households and businesses. 

Sources:

1. “Inflation: Prices on the Rise.” IMF, 30 July 2019, www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Inflation.

2. Kpodar, Kangni, and Boya Liu. “The Distributional Implications of the Impact of Fuel Price Increases on Inflation.” Energy Economics, vol. 108, Mar. 2022, p. 105909, doi:10.1016/j.eneco.2022.105909.

3. Bartik, Alexander W., et al. “The Impact of COVID-19 on Small Business Outcomes and Expectations.” Proceedings of the National Academy of Sciences, vol. 117, no. 30, July 2020, pp. 17656–66, doi:10.1073/pnas.2006991117

4.  Consumers’ Attitudes and Their Inflation Expectations∗ Michael Ehrmann,a Damjan Pfajfar,b and Emiliano Santoroc aEuropean Central Bank bFederal Reserve Board cUniversity of Copenhagen