Inflation is a phenomenon that, contrary to appearances, can have not only negative, but also positive effects on business. So what are its causes? How does inflation affect exchange rates? Answers to these and other questions can be found in this article.
Positive and negative effects of inflation on business
The negative effect of inflation, as is well known, is a decrease in the real value of money, which means that less goods can be bought for the same amount of money than before. In business, however, inflation contributes not only to an increase in business costs, but also to increased wage pressure, due to the fact that employees raise their salary expectations. As a result, businesses are forced to raise the prices of the services they provide and the goods they sell, as this allows them to remain profitable. However, it is worth being aware that inflation also has a positive impact on business. Provided, of course, that it is not too high (a few percent at most), as it then stimulates economic growth. This is because a controlled increase in prices allows you to earn more, which translates into benefits for the economy as a whole.
Causes of inflation in Poland and abroad
Inflation is a phenomenon that can have many different causes. Currently, it is largely the result of the turmoil caused by the COVID-19 pandemic and the subsequent outbreak of war in Ukraine. However, it is worth being aware that the cause of inflation both in Poland and abroad is the type of monetary policy pursued (the formation of interest rates), or the size of funds allocated for investment. Rising commodity prices have also certainly contributed to the rise in inflation, as they have translated into an increase in the cost of producing goods and services. What else can affect inflation? Well, in Poland, the fight against inflation is certainly hampered by the state’s social policy (granting various types of benefits and allowances to various groups) and the high rate of increase in the minimum wage, because as a result there is much more money in the economy. Their real value, however, is declining because prices are rising much faster.
Inflation’s impact on exchange rates
Inflation is undoubtedly one of the factors that affect exchange rates. This can be confirmed by the fact that the increase in inflation in Poland has caused the zloty to weaken against the dollar, or the euro, and the positive information on inflation recorded in recent months makes our currency recover. What is the reason for this? Well, rising inflation in a country causes demand for a particular currency to fall, as a result of the weakening of its economy. Important in this case, of course, is the dependence of the currencies in question, or the level of inflation recorded, for example, in Poland and the Eurozone. This is because the impact on the exchange rate is greater, the greater the difference in inflation occurring in the two economies.
In conclusion, it should be said that inflation is a phenomenon that affects not only price increases, but also unemployment rates or exchange rates. What is important, however, is that, properly controlled, it can have a positive impact on business, as it stimulates the economy.