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. For firms like Pound / Dollar shops, this high inflation could be particularly damaging because it becomes harder to find goods which can be sold for a Pound.
- However modern technology makes changing prices much easier than before. These days, you don’t need to change prices manually, but can update bar codes and this is less time consuming.
- 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.
