Inflation

What is Inflation?

A sustained rise in the general price level in an economy, which reduces the real purchasing power of a given amount of money. Inflation describes the average movement of prices, not a uniform rise: individual prices rise at different rates and some fall. For a business it can raise input and wage costs, create uncertainty in pricing and contracting, and weaken customers' real spending power, with the net effect depending on whether the business can pass higher costs on in its own prices.

This definition is part of the External Influences on Business Activity chapter in Cambridge O Level Business Studies.

Concepts related to Inflation

• real purchasing power
• wage pressure
• pricing power
• cost push

Common mistakes with Inflation

• “Inflation means all prices go up by that amount.” Fix Inflation is a sustained rise in the general price level. Individual prices rise by different amounts, and some fall. A firm whose input prices rise faster than its selling price is squeezed even in a low-inflation economy.

Examiner tips on Inflation

• The pricing-power question. Whether inflation squeezes a firm's margin depends on whether it can raise its own prices without losing customers. A specialist engineering firm with few substitutes usually can. A supermarket own-brand supplier facing a powerful buyer usually cannot. Say which, and why, before you claim profit falls.
• What this gives you in an answer. When a case says the government has raised interest rates, you can say why: it is almost always pursuing the low-and-stable-inflation objective, accepting a cost to growth. That single sentence turns a description into an explanation.