THE IMPACT OF INFLATION ON BUSINESS

Inflation can adversely affect business in a number of ways:

1. Accounting and financial problems.

Significant rates of inflation can cause accounting and financial problems for business. They may experience difficulty in valuing assets and stocks, for example. Such problems can make forecasting, comparisons and financial control more onerous.

2. Falling sales.

Many businesses may experience falling sales during inflationary periods for two broad reasons. Firstly, it may be that saving rises in a time of inflation. We would expect people to spend more of their money when prices are rising to avoid holding an asset (cash) which is falling in value. However, during the mid – 1970s, when industrialized nations were experiencing high inflation rates, saving as a proportion income rose. It is not easy to identify the reason for this, but some economists suggest that people like to hold a relatively high proportion of their assets in a form which can be quickly converted into cash when the future is uncertain. Whatever the reason, if people save more they spend less and businesses suffer falling sales. The economic model predicts, that if savings raised the level of activity in the economy would fall. Clearly, if this happened we would expect businesses to experience difficulty in maintaining their levels of sales.

Business may be hit by a reduction in sales during a time of inflation for a second reason. As inflation progresses, it is likely that workers’ money wages (that is, wages unadjusted for inflation) will be increased broadly in line with inflation. This may well take a worker into a higher tax bracket and result in a higher percentage of his or her wages being taken as tax. This process known as fiscal drag, will cause workers to have less money available to spend on firm' s goods and services. The poverty trap has a similar impact. As money wages rise the poor may find that they no longer qualify for state benefits to supplement their incomes and at the same time they begin to pay income tax on their earnings. Again, this leaves less disposal income to spend on the output of firms. Finally, it may be that the wages of many groups are not index-linked and so they rise less quickly than the rate of inflation, causing a reduction in spending power and demand for goods and services.

One again, the economic model can be used to predict that increases in the level of taxation will increase with drawls, lowering the level of economic activity and depressing firm’s sales.

Not all business will suffer equally from declining demand in an inflationary period. Those selling essential items such as supplying less essential goods and services such as foreign holidays may be hard hit.

3. High interest rates.

Inflation is often accompanied by high interest rates. High interest rates tend to discourage investment by business as they increase the cost of borrowing funds. Thus, investment may fall. Business may also be dissuaded from undertaking investment programmers because of a lack of confidence in the future stability and prosperity of the economy. This fall in investment may be reduced by foreign investment as they also lose some confidence in the economy' s future.

Such a decline in the level of investment can lead to businesses having to retain obsolete, in – efficient and expensive means of production and cause a loss of international competitiveness. Finally, a fall in investment can lower the level of economic activity, causing lower sales, output and so on. Thus, to some extent, business can influence the economic environment in which they operate.

4. Higher costs.

During a period of inflation firms will face with higher cost for the resources they need to carry on their business. They will have to pay higher wages to their employees to compensate them for rising prices. Supplies of raw materials and fuel will become more expensive as will rents and rates. The inevitable reaction to this is that the firm has to raise its own prices. This will lead to further demands for higher wages as is called the wage-price spiral.

Such cost-push inflation may make the goods and services produced by that enterprise internationally less competitive in terms of price. An economy whose relative or comparative rate of inflation is high may find that it is unable to compete in home or foreign markets because its products are expensive. The economic model tells us that a situation of declining exports and increasing imports will lower the level of activity in the economy with all the consequent side - effects.

NOTES:

impact – удар, толчок, влияние, воздействие;

make more onerous – сделать более затруднительным;

to avoid holding an asset – чтобы избавиться от наличности;

whatever the reason – какова бы ни была причина;

business may be hit by – фирмы (предприятия) могут пострадать от …

wages unadjusted for inflation – заработная плата без учета уровня инфляции;

a higher tax bracket – группа, категория (при группировке налогоплательщиков по доходу);

fiscal drag – финансовый тормоз экономического роста с помощью налоговых изъятий;

they no longer qualify for – они больше не подпадают под …

to supplement their incomes – что является дополнением к их доходу;

this leaves less disposable income – из-за этого остается меньше средств;

index – linked – индексированный;

a reduction in spending (buying, purchasing) power – снижение покупательной способности;

declined demand – падение спроса;

tend to discourage investment – не способствуют инвестированию;

may also be dissuaded from – могут также отказаться от …

a lack of confidence – недостаток (отсутствие) уверенности;

this fall in investment may be worsened by foreign investment being reduced – это падение уровня инвестирования может стать еще сильнее, если сократятся иностранные инвестиции;

can lead to business having to retain – может привести к тому, что фирмам (предприятиям)

придется сохранить;

less competitive in terms of price – менее конкурентноспособный в смысле цены;

COMPREHENSION QUESTIONS:

1. What ways can inflation adversely affect business in?
2. What do accounting and financial problems mean?
3. What is the first reason of falling sales during inflationary periods?
4. What is the second reason of a reduction in sales during a time of inflation?
5. Will all businesses suffer equally from declining demand in an inflationary period? If not, why?
6. Is inflation often accompanied by high interest rates?
7. How do high interest rates affect investment?
8. What other problem will firms face during a period of inflation?

VOCABULARY EXERCISES:

Exercise1. Suggest the Russian equivalents:

Difficulty in valuing assets and stocks; to avoid holding an assets; wages unadjusted for inflation4 this may well take a worker into a higher tax bracket; fiscal drag; poverty trap; wages are not index – linked; spending power; the cost of borrowing funds; the wage – price spiral; in terms of price.

Exercise 2. Replace the underlined words by synonyms:

Broad reason; to identify the reason for this; business may be hit by a reduction in sales; wages unadjusted for inflation; in line with; to supplement incomes; will increase with drawls depressing firms' sales; may be dissuaded from undertaking.

Exercise 3. Fill in the gaps with the words and expressions from the text:

1. Accounting and financial problems can waste ___ and make ___, ___ and ___ more ___.
2. Business may be ___ by a reduction in sales.
3. The process, known as ___, will cause workers to have less money available.
4. If the wages are not ___, they rise less quickly than the rate of inflation.
5. Those selling ___, such as food may be little affected in an inflationary period.
6. High interest rates tend to ___ by businesses.
7. The fall in investment may be ___ by foreign investment being reduced.
8. Firms will have to pay higher wages to their employees to ___ rising prices.

Exercise 4. Find in the text English equivalents for the following.

Делать что-либо затруднительным; периоды инфляции; назвать причину чего-либо; превратить в наличные; распространяться на кого-либо (о государственных льготах); доход, остающийся после уплаты налогов; товары первой необходимости; компенсировать кому-либо что-либо.

Exercise 5. Translate the sentences into English using all the active possible:

1) Концепция инфляции спроса предполагает, что если экономика стремится к высокому уровню производства и занятости, то умеренная инфляция необходима.

2) Однако сторонники концепции инфляции издержек утверждают, что умеренная инфляция, которая может сначала сопутствовать оживлению экономики, потом нарастая как снежный ком, превратится в более жестокую гиперинфляцию (чрезвычайно быстрые темпы роста инфляции, которая оказывает разрушительное действие на объем национального производства и занятость).

Exercise 6. Divide the text into logical parts and make up a plan of your own.

Exercise 7. Retell the text using your own plan and words and expressions from Lesson 2, ex. 7.

Text B

Exercise 1. Read the text without using a dictionary and find the sentences which are the answers to the questions.

1. Why did consumer prices rise 0.2 per cent between September and October?

2. What had market analysts been expecting?

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