Transcript Assessing-Changes-in..

Inflation
• To understand what inflation is
• To identify how inflation might affect businesses
• To evaluate how businesses might respond to inflation
Starter: Find out how
much the average
salary was in 1980
and how much it is
today?
Inflation
“a sustained increase in the average price level”
1980
Wages:
£6,000
2015
Wages:
£26,500
(focus on whole economy - not one particular industry – it’s possible for
individual industry to experience decreasing prices when the economy is
experiencing overall inflation)
Inflation Target
As prices rise, the value of money falls – the same
money can’t buy as much as it used to.
Gov’t has set a target of 2% - best for a stable
economy
The Bank of England is charged with the
responsibility of controlling inflation through changes
in the interest rate.
Measuring Inflation
A basket of goods represents the average collection of
goods bought by households.
The price of the overall basked is compared month to
month.
The percentage change of the price of the basket = rate
of inflation that month.
What is in the Basket
of goods?
Next’s chief executive, Lord Wolfson, has said George Osborne’s
new national living wage will cost the company £27m a year by
the end of the decade and risks creating a potentially harmful
inflationary loop.
Wolfson, a Conservative peer and friend of the chancellor, said
Next would raise prices to offset the cost of implementing the
higher pay rate, although the increase could be as little as 1%.
Under the chancellor’s plans, the minimum wage for over-25s
will increase from £6.50 an hour at present to £7.20 in April
next year, before rising to at least £9 by 2020. Next’s pay rate
for adult starters is £7.04.
Wolfson’s comments are the latest in a series from companies
about the impact of the new higher pay rate. Whitbread, the
owner of Costa Coffee and Premier Inn, has said it will look at
“selective” price rises to offset the cost, and the recruiter
Manpower said the new rate has sent shockwaves through the
labour market.
Cost-Push Inflation
• Firms respond to higher costs by increasing prices
Causes:
↑imported raw material costs
↑ labour costs
↑ indirect or direct taxes paid by firms
Demand-Pull Inflation
• Significant demand from consumers leads
firms to put prices up because consumers
are willing to pay more
Causes:
↑ exports
↓ interest rates → ↑ consumer spending
↑ wealth effect from ↑ house prices or stock market boom
Inflation and businesses… A little case study.
Cadbury Schweppes has reported a 7% growth in the value of
confectionery sales over the past 3 months. The two main reasons are
the huge success of its of its new chewing gum brand, Trident, and the
higher prices for most products. These higher prices were necessary to
cover higher raw material costs caused by world inflation and the
depreciation of the £ sterling exchange rate.
1. Would you classify Cadbury’s decision to raise prices as being led by
cost-push or demand-pull factors?
2. What can you say about the price elasticity of demand for
Cadbury’s confectionery products from the information above?
• http://www.telegraph.co.uk/sponsored/business/smehome/news/10841654/low-inflation-business.html
Effects of Inflation on Businesses
• Increased costs – raw materials and other
factors of production (labour? land?)
- changing prices all the time also costs
money (menu costs)
• Uncertainty – difficult to plan, difficulty to
invest
- consumers also don’t respond well to
uncertainty and may hang onto their money
http://www.telegraph.co.uk/sponsored/business/sme-home/news/10841654/low-inflation-business.html
Effects of Inflation on Businesses
• Borrowing costs may rise – MPC may raise interest rates to combat
inflation
• Paying off previous debts may become easier as their nominal value looks
smaller compared to current figures
• Wider price increases could include revenue
• As inflation rises, so do property prices and the price of stock. Thus balance
sheets tend to look healthier as rising property and stock values boost
reserves.
Effects of Inflation on Businesses
• Worker unrest – workers may feel uneasy about rising prices and
demand higher wages – could lead to conflict between workers &
mgm’t
• Loss of competitiveness – UK prices look higher and higher compared
to international prices → ↓ exports
Business strategies…