Impact of Inflation on SMEs and Tourism Industry in UK

This research project aims to understand the concept of inflation and its impact on the tourism industry of United Kingdom. It identifies the impact of inflation on SMEs within the tourism industry of UK and determines solutions and strategies to diminish the negative impact of inflation on SMEs within the UK tourism industry.

Foundation Year
Research Project

Table of Contents
INTRODUCTION...........................................................................................................................3
Concept of inflation.....................................................................................................................3
Events leading inflation in an economy......................................................................................3
Research aims and objectives......................................................................................................4
MAIN BODY...................................................................................................................................4
Impact of inflation on SME.........................................................................................................4
Positive and negative impact of inflation on tourism industry...................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7
Books and Journals:....................................................................................................................7
Online:.........................................................................................................................................7
APPENDIX......................................................................................................................................8

INTRODUCTION
Concept of inflation
Inflation defines as the measure of buying power. It acts as a rate at which the prices of
goods or services change over a certain period of time (mainly a year). It is found that when
inflation arises in an economy then consumer's spending pattern is declining as they cannot
afford to purchase with higher prices. There are many reasons that leads inflation in an economy
such as imbalance between demand and supply, changes in distribution cost, changes in
production cost or increases in taxes on goods and services (Bui, 2019). Hence, when an
economy experiences inflation that is when the price level of products and services increases
then the value of currency falls which signifies now each unit of currency purchases lesser
products and services. In the following project, there will be identification of impact of inflation
on SME along with positive and negative influences on tourism industry.
Events leading inflation in an economy
During inflation, inflation has worst impact on consumers. Increases prices of day to day
or essential products or services make it complicated for consumers to afford even the necessary
things in life. It makes them with no option but to ask for higher earning or income. Therefore,
the government tries to keep inflation under control. Contrary to its negative influences, a
moderate level of inflation features a good economy. The rate of inflation of 2% or 3% is
advantageous for an economy as it motivates people to shop more and borrow more because at
the times of lower inflation, the level of rate of interest also remains low.
Inflation can be caused by different events such as global events, interest rates and many
more. When other economies increases their prices of their products or increases their import or
export charges then it is obvious that it will influence other countries as well. Suppose, if Russia
increases their import and export prices and UK based company purchases their raw material
from Russia, then that company have to purchase their raw materials even at higher prices and to
cover their expenses or additional costs, the company will sell their final products at higher
prices.
Whereas, inflation is also lead by increasing rate of interests. It has been seen that when
the interest rate is low, then the supply of money will be increases, resulting inflation rises which
means that demand is enhanced (Arsić, Mladenović and Nojković, 2022). Consumer borrows

money in terms of loan from the banks and invest for their own purpose in the market. When
government sees that money is more circulated in the market then they increases the interest
rates on such loans so that such circulation can be controlled.
Research aims and objectives
Aim of the research: The aim of this research is to understand the concept of inflation along
with its impact on the tourism industry of United Kingdom.
Objectives of the research:
 To understand the concept of inflation
 To identify the impact of inflation on SMEs within tourism industry of UK
 To determine solutions and strategies to diminish the negative impact of inflation on
SMEs within in UK tourism industry
MAIN BODY
Impact of inflation on SME
Small and medium sized enterprises (SMEs) refers to independent and non-subsidiary
organisations which have less number of employees and revenue for the business. It cannot
increase their number of employees beyond 250. These companies are not familiar to the market
but plays a significant role in the overall development of an economy. It aims to reduce
unemployment, pollution, poverty, slums and so on in the economy. Also, as these companies
are not familiar to the market, it also has less customer base for their business. SMEs also has
been impacted by the inflation. It is found and researched that there are many tourism agents and
organisations who are performing their operational activities at small scale and when inflation
occurs in their tourism industry the these enterprises are affected badly. 9.4% is the current
inflation rate of UK, resulting increased prices of fuel (Butler, 2022). Moreover, there are around
1650 travelling companies which demonstrates that they have found a galactic fall in their
business revenue due to the impact of inflation. Travelling customers also reduces their travelling
consumption where some of them cancel their travelling plans and other wait for deflation
situation where prices gets reduced. In addition, many customers also switch to other brands
which offers tourism products in low prices. It is seen that every three of five customers shows
that they only suppose to travel for commercial purpose at the time of inflation and if the
travelling goal is to enjoy vacation or holidays then they move to other destinations which has

low prices or even postponed their plans when prices are high for such destination (Aziz, Li and
Telang, 2022).
Interpretation: The interpretation from the above chart is that GDP growth of UK has
opposite relationship with inflation. From the above diagram, it is shown that when inflation
goes down than gross domestic profit of country gets increased and when inflation is rising then
the GDP rates has been decreased. Thus, it can be said that SMEs always possessed a
fundamental role in the growth of GDP but it also gets affected during inflation.
Positive and negative impact of inflation on tourism industry
As per the viewpoint of Lawton and Gallagher (2020) inflation is inevitably bad for the
economy as it can make good influences on the overall economy of the nation. There are many
travellers who travel for their business purpose as travelling and roaming around the world
makes money for their survival. For example, social media influencers, video maker, bloggers,
content creator and much more travel around the world not for their own purpose but it travelling
makes money for them. They travel even when the prices are high as this is that part of their job.
Thus, it can be said that travelling businesses can make more money during inflation, thus it
creates positive impact on them. Such travelling and tourism organisations can charge high
prices from such clients and generate revenue for the business.
While, Kouvavas and et.al. (2020) thinks that inflation causes different negative impacts
on tourism industry. One of the major causes is increased cost of living where customers will

have to pay extra prices on the regular goods and services for consumption. This may not
essentially be an issue if incomes increase in line with inflation, but those who do not will face
higher actual prices. In simple words, they will have to invest a good amount of money on the
same number of products. As the customers are price sensitive, they highly gets influenced when
the prices of essential and basic goods increases. In tourism industry, when inflation takes place
in the economy, tourism organisations increases their prices of holiday packages, flight tickets,
accommodation and many more. Because of this reason, consumers cancel their plans of
travelling or move to the other destination which have low inflation rate. It negatively impacts
the revenue, sales and input of the tourism organisations. In UK, tourism industry, there are
many businesses who run their business at small level i.e. SMEs who have faced bad impacts of
inflation. Many SMEs have shut their business doors at they were not capable to operate their
activities during inflation (Weiß, Homburg and Puig, 2019). When inflation happens, most of the
businesses terminate their labour as they they are not able to pay their wages timely. The reason
behind is that lose of customer base when prices increases due to inflation. Hence, it creates
unemployment in the economy which is not good at all.
CONCLUSION
From this project, it is concluded that inflation refers to the state where prices of products
and services increases and the buying power of consumers reduces. It is identified that inflation
has a major impact on SMEs due to which business activities gets affected, customer base
reduces, profitability gets minimised and so on. It is seen that inflation plays both positive and
negative role in the tourism industry. Hays Travel is the travel organisation in UK which also
gets impacted as they lose many customers during inflation who were not ready to pay more
prices of travelling services or products. However, Jet2holidays gets benefited from the inflation
as they could be able to charge prices during inflation. The reason found out is that they are clear
on their target customers i.e. social media influencers, bloggers who are not worried of paying
extra money. Hence, inflation creates the chance of making big profit for that business.
Moreover, it is suggested to the Hays travel to be clear on their target customers and analyse
environment factors effectively so that they could know the impacts of such situation.

REFERENCES
Books and Journals:
Bui, T.N., 2019. INFLATION AND STOCK INDEX: EVIDENCE FROM VIETNAM. Journal
of Management Information & Decision Sciences, 22(4).
Arsić, M., Mladenović, Z. and Nojković, A., 2022. Macroeconomic performance of inflation
targeting in European and Asian emerging economies. Journal of Policy
Modeling, 44(3), pp.675-700.
Aziz, A., Li, H. and Telang, R., 2022. The Consequences of Rating Inflation on Platforms:
Evidence from a Quasi-Experiment. Information Systems Research.
Lawton, N. and Gallagher, L.A., 2020. The negative side of inflation targeting: revisiting
inflation uncertainty in the EMU. Applied Economics, 52(29), pp.3186-3203.
Kouvavas, O. and et.al., 2020. Consumption patterns and inflation measurement issues during
the COVID-19 pandemic. Economic Bulletin Boxes, 7.
Weiß, C.H., Homburg, A. and Puig, P., 2019. Testing for zero inflation and overdispersion in
INAR (1) models. Statistical Papers, 60(3), pp.823-848.
Online:
Butler S., 2022. Everything is going up’: UK hospitality sector struggles as inflation soars
[Online] available through: <https://www.theguardian.com/business/2022/jul/20/uk-
hospitality-sector-struggles-as-inflation-soars/>

APPENDIX