Last week, this blog listed reasons why every small business
should worry about deflation.
Shamelessly hedging our bets, we now say that every small
business should also fear inflation.
So which are we actually going to get? Inflation or
deflation? Classical economists say we cannot have both.
Yet we have had both in the past – or rather we have had
elements of both, either simultaneously or successively.
So here are some reasons why elements of inflation, or
inflationary pressures, can be bad for business, even in recession.
1 Inflation increases the rate of return
necessary to make a profit.
2 Inflation destroys cash reserves –
especially dangerous as a time when a liquid cash reserve is more valuable than
3 Inflation makes rational planning and
budgeting practically impossible.