Inflation
The Effects of Inflation on Households
Decreasing Purchasing Power
Wage and Income Changes
Saving and Investment Behaviour
- Property Investment: With high inflation, house prices may increase beyond the purchasing power of the consumer. As a result, individuals may postpone plans to purchase housing as deposits grow. A 1 bed valued at £150,000 will require a £15,000 deposit, which is a higher burden when inflation is high.
- Luxury Purchases: As disposable income decreases due to a rise in the cost of living, individuals may reduce spending on luxury goods, affecting sectors like travel and hospitality. However, recent demand for travel and tourism has not decreased due to ‘revenge spending’ on travel following the lifting of Covid-19 restrictions.
- Savings and Investment: Inflation reduces the value of savings and investments, making them less attractive to individual consumers. For example, if the saving rate is 4% while inflation is 10%, this is a 6% decrease in the real value of your savings.
Borrowers vs Lenders
The Economy - Don’t Panic But Do Worry | FAI
What does official data tell us about the state of the Scottish economy? What changes should businesses be watching out for?
fraserofallander.org
The Effects of Inflation on Firms
Increased Input Costs and Decreased Profitability
‘An all time low’: UK hospitality bosses say industry is fighting for survival
The sector is facing many challenges, from staffing issues to inflation that could push the price of a pint to £7
www.theguardian.com
Consumer Demand Shifts
Labour Availability
Planning and Investment
Scottish firms struggle with the cost of doing business crisis | FAI
This press release summarises the key results from our latest Fraser of Allander (FAI) Scottish Business Monitor, published in partnership with Addleshaw Goddard. The cost of doing business crisis…
fraserofallander.org
The effects of inflation on different groups
Group | Effect of Inflation | Effect of Deflation |
Borrowers | Benefit as the real value of debt decreases | Disadvantaged as the real value of debt increases |
Savers | Lose out as the value of savings decreases | Benefit as the value of savings increases |
Importers | As inflation rises, we typically buy more imports as goods are cheaper. However, over time, the price of imported goods will increase, decreasing profit margins. | Benefit as cost of importing goods decreases due to strong currency |
Exporters | Disadvantaged as their goods become more expensive for foreign buyers | Benefit as their goods become cheaper for foreign buyers |
Government | Debt burden decreases | Debt burden increases |
People on Fixed Incomes | Lose purchasing power as cost of living increases | Gain purchasing power as cost of living decreases |
Pensioners | Lose if their pension is not inflation-proof | May gain if their pensions are fixed and living costs decrease |
Consumers | Buying power decreases as prices increase | Buying power increases as prices decrease |
Effects of inflation are not felt equally by all households | FAI
Not all households are equally affected by rising prices. New ONS data show that low-income households and pensioners face the highest rates of inflation.
fraserofallander.org
Effect of high inflation
Effect of deflation
Deflationary Spiral: a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price.