![]() ![]() For many companies, the trick is to strike a balance between raising prices to make up for input cost increases while simultaneously ensuring that they don’t rise so much that it suppresses demand, which is touched on later in this article. In response, companies typically raise the prices of their products or services to offset inflation, meaning consumers absorb these price increases. Companies lose purchasing power, and risk seeing their margins decline, when prices increase for inputs used in production, such as raw materials like coal and crude oil, intermediate products such as flour and steel, and finished machinery.Households, or consumers, lose purchasing power when the prices of items they buy, such as food, utilities, and gasoline, increase.Here’s a quick explanation of the differences in how inflation affects consumers and companies: Inflation affects consumers most directly, but businesses can also feel the impact. Conversely, when inflation begins to surpass wage growth, it can be a warning sign of a struggling economy. And there can be positive effects of inflation when it’s within range: for instance, it can stimulate spending, and thus spur demand and productivity, when the economy is slowing down and needs a boost. In a healthy economy, annual inflation is typically in the range of two percentage points, which is what economists consider a signal of pricing stability. ![]()
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