Inflation

Inflation is a sustained increase in the general price level over time. It does not mean one product has become more expensive; it means prices are rising across the economy as a whole. The rate is usually shown as a percentage per year.

Why it matters to businesses

Rising inflation pushes up the cost of business inputs such as materials, energy and wages. To protect profit, a business may raise its selling prices, but that can deter customers.

Inflation also reduces the real value of consumer income when wages do not rise at the same rate. If your pay goes up by 2% while prices rise by 6%, you can buy less. Households often cut back on non-essential goods first, so demand for treats and luxuries may fall.

High inflation can make UK exports less competitive if UK prices rise faster than prices in other countries. Foreign buyers may switch to cheaper alternatives from elsewhere.

Hyperinflation

Hyperinflation is a very high and accelerating rate of inflation. Prices can change so quickly that businesses struggle to plan costs and set prices, which makes trading very difficult.

For example, Bramble Bikes imports gears and sells some bikes abroad. Inflation of 5% raises its component and wage costs, so it increases its prices by 5%. Its UK customers' wages rise by only 2%, so their real income falls and sales of its premium range drop. Rivals based abroad face lower inflation, so overseas buyers find Bramble's bikes more expensive and export orders fall.