Inflation in the UK and many other parts of the world is rising at its fastest pace in decades. The Consumer Price Index shows that the cost of living has risen for ten months consecutively in the UK, now sitting at 9.1%. This is estimated to be the highest level since 1982.
But what is inflation? The rate of inflation is used to measure the current cost of living based on numerous metrics such as the price of goods and services, like fuel or food. When the cost of living goes up, the value of the British pound, for example, depreciates. In other words, most things become more expensive.
The global jump in inflation can be attributed, in greatest part, to the economic impact of the Covid-19 pandemic and the Ukraine invasion, both which have forced a rise in fuel and energy costs as well as the price of food.
In an attempt to control spiralling inflation, central banks in numerous countries have increased interest rates, with the Bank of England, for example, hiking the figure to 1.25%in mid-June. For consumers, this means borrowing money from the bank, such as taking out a mortgage, becomes more expensive.
The same story for companies
Like consumers, most businesses are facing increased costs across the board, operationally speaking (i.e. energy prices) or financially speaking (i.e. the higher price of taking out a loan).
In many cases, although it varies from sector to sector, this means less money for business expansions or pay rises, which, interestingly, does not necessarily amount to fewer expansions or smaller pay rises. How so?
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In terms of companies opening new offices or facilities abroad – foreign direct investment (FDI), in other words – the impact of inflation is twofold. “Some companies may seek a less inflation-sensitive destination and plan to move operations there in lieu of rising costs in a current location,” says Glenn Barklie, chief economist at Investment Monitor.
“On the other hand, with rising energy and food prices driving up costs and tightening profits, companies could see FDI as too risky in the current climate,” he adds.
The second impact of inflation on businesses relates to talent and workforce. “As individuals’ costs rise there may be increased pressures on companies to raise wages,” explains Barklie. “People may be more open to switching roles in order to maintain a similar standard of living.”
Although living environment factors have always been a small part of the investment decision-making process, the importance in recent years has grown.
“Generally this has been due to the development of niche tech-based subsectors,” says Barklie. “However, for businesses the ability to attract and retain talent is affected more and more by the wider location factors of its location’s cost and quality of living.”
In summary, the rising cost of living could very well see a significant minority of businesses and workers (especially in white-collar jobs) making rapid location or career swaps. That said, for most people and companies, simply staying put and dealing with rising costs will be the order of the day.