Impact of Inflation on SMEs & Tourism Industry

This research project discusses the impact of inflation on SMEs & tourism industry. It includes statistical data regarding the impact of inflation, positive and negative impacts of inflation, and recommended measures to reduce adverse impacts. The study aims to understand the concept of inflation, scrutinize its influence over SMEs and tourism industry, and investigate the factors that positively and negatively impact the tourism industry.

MGBBT0FYP Research
Project

Table of Contents
INTRODUCTION...........................................................................................................................2
MAIN BODY..................................................................................................................................3
Statistical Data Regarding Impact of Inflation on SMEs & Tourism Industry...........................3
Positive and Negative Impacts of Inflation.................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
1

INTRODUCTION
An economic situation that results in increase in prices of commodities and services is
referred to as Inflation. There are various effects of inflation one such impact is decreasing
demand for goods & services in the economy due to decrease in purchasing power of the
customers. The adverse impacts of inflation are faced by both the business organizations and the
customers. The inflation affects the revenue of the business as the demand by consumers fall
generating low sales for their businesses (Athari and et.al., 2021). The impact over consumer is
that it becomes difficult for them to save money. High inflation creates a situation where the
people are unable to purchase even the essential goods and services. The prices basic life amities
such as food, shelter, medicines, fuel, etc. increases substantially.
The increase in inflation can be because of various factors that also affects the overall
efficiency of the economy. The list of factors that leads to increase in inflation in the economy
are primary causes, rise in the public spending, government expenditure’s deficit financing,
increase the money circulation velocity, increase in population, hoarding of products by
suppliers, exports, genuine shortage of products, trade unions, implication of indirect taxes,
reduction in taxes, increasing prices in international markets (Meo and et.al., 2018). In addition
to this some non – economic reasons also give rise to inflation, for example, natural calamities.
The inflation can be of certain types such as demand – pull inflation, supply – side inflation, cost
– push inflation, open inflation, hyper – inflation, repressed inflation.
The aim of the current study is to recognise the measures available to tourism companies
for countering the inflationary pressure of the economy exerted on the businesses.
Research Objects
 To understand the concept of inflation and factors responsible for it.
 To scrutinize the influence of the inflation over the SMEs through reliable statistics.
 To investigate the positive impacts and the negative impacts of inflation over the tourism
industry.
 To recommend the measures to reduce adverse impacts of the inflation on tourism
industry.
Research Questions
 What is inflation and what all are the reasons causing inflation?
2

 What are the reliable statistical data with respect to the influence of inflation over tourism
industry & SMEs?
 How different factors positively and negatively impacts the tourism industry?
 What are the recommendations that can reduce such negative impacts?
MAIN BODY
Statistical Data Regarding Impact of Inflation on SMEs & Tourism Industry
Inflation is a situation in the economy of rising prices of goods and services of household
needs. To measure inflation a formula is used that basically calculates the percentage change in
the prices in the current year from the past year. In most of the cases generally over the time
price of goods and services rise but in some conditions an opposite scenario happens where the
price of goods and services falls this situation is known as deflation (Chi, 2022). The measure of
inflation is done with the computation of consumer price index abbreviated as CPI. The change
in the price of the commodities and facilities used by the household in percent form is called
CPI. Price in the current year minus price in the previous year, divided by previous year price
into hundred is the standard formula used for the calculation of CPI. CPI of UK shows an
increase of nearly 9 % from the previous year’s august. The current inflation rate of the economy
3

of UK is 4 %. The 95 % of the UK SMEs are affected from the increasing prices. The impact of
inflation on small and medium businesses very huge. The inflation means increase in the demand
of the products and services in the response of which the production needs to be increase to
supply the products in high demand in the economy. To increase the production more factors of
production are required such as materials, labour and other variable factors (Kırca and Özer,
2020). The problems faced by the businesses is to arrange these factors of production at the
affordable prices during the inflation pressure of the economy. They find it difficult to increase
their scale of production and hence the already produced goods are made available at higher
prices in the economy. The operational efficiency management is the major task for the
enterprises. The connection of high inflation is with the high food cost, demand for high wages
by the labours due to increase in cost of living and shortages of labour.
Positive and Negative Impacts of Inflation
According to Turner and et.al. (2019) the inflation can be both positive and negative for
the tourism industry. The customers of tourism industry are basically of two categories, the price
sensitive customers and the price insensitive customers. The price sensitive customers are the
ones who consider price as an important factor to their buying decisions. Small and medium
sized firms of tourism industry in UK take advantage of earning high sales revenue by offering
such customers affordable travel packages. Price insensitive customers are the ones whose
spending decisions are not affected by the prices of commodities and services. the tourism
business enterprises serving these people earn profits by offering quality services even in rising
inflation situations. According to Chao and et.al. (2020) The possibilities of getting loans for
further investing and growing business increases. The shareholders to the industry receives
higher returns and hence the another positive impact over the companies is that the investors are
encouraged to invest more. The unemployment problem in the economy starts reducing because
more number of labours and workers are required to meet the sales effectively. As the people
starts getting employed income generation enhances.
According to Karydas, Papantonopoulos and Saridakis (2021) there are various negative
impacts of the inflation that are faced by tourism industry. The high inflation results in rise in the
costs of the routine expenses of the businesses in the industry and the rates of the rooms by the
hotels are also increasing. The customer who consider price as a major factor steps back to travel
during this period. The energy costs for the hotels increases during the conditions of inflation
4

whose impact is seen on the rates of the rooms and food and other services offered by these
businesses. The negative impact is seen on prices of all the components of the travel related
activities. The prices of transport services which includes transport by railway, buses, taxis, etc.
increases, holiday packages, recreational services, cultural services, catering services increases.
This make it costlier for the people to travel more often, affecting the profitability of the
companies in this sector.
CONCLUSION
On the basis of the research conducted it can be concluded that inflation is a concept in
economics that is used to refer to an economic condition where prices of commodities rise. The
impacts of this aspect of economy is suffered by very industry. It becomes essential for the
business organizations as well as the government to devise effective strategies so that the
effective operations of the enterprise can be ensured. There are certain recommended measures
that can be helpful for the tourism industry to reduce the adverse impact of the inflation. The first
strategy that can be used for this purpose is relocation of cash. It is considered good to have
liquid assets in hand during the times of crises but in the situation of high inflation the
purchasing power of the money falls. Hence it is not advisory to have abundance of cash, it can
alternately use to purchase some equipment or such assets that can generate value to the
business.
Another strategy that can be used by businesses in the sector to deal with inflation is to
control the wages and the prices. The wages of the people must be reduced so that the demand
for goods and services by them falls because of the lesser amount of money available to them for
spending (Page and Connell, 2020). This will lead to reduction of inflationary situation is the
economy. Another strategy that can be used by the industry is the setting of fixed rate of
exchange to reduce inflation. The government and the central bank tries to keep the lowest
exchange rate of the domestic currency. The more number of foreign tourists are attracted to
travel in the country as it becomes cheaper for them to travel. The significant advantage of using
such strategy for the industry is that it enhances its competitive advantage.
Conclusively, it can be said that by using various recommended strategies companies in
tourism sector can minimize the impact of inflation over the businesses. The working efficacy of
the country overall rises and activities becomes efficient greatly.
5

REFERENCES
Books and Journals
Athari, S. A. and et.al., 2021. The (Un) sticky role of exchange and inflation rate in tourism
development: insight from the low and high political risk destinations. Current Issues in
Tourism. 24(12). pp.1670-1685.
Chao, K. Y. and et.al., 2020. Sustained inflation: The lung recruitment maneuvers for
neonates. Paediatric Respiratory Reviews. 36. pp.142-150.
Chi, J., 2022. Asymmetric own-and cross-price effects: the case of US outbound tourism
demand. Current Issues in Tourism. 25(15). pp.2479-2499.
Karydas, S., Papantonopoulos, E. and Saridakis, E. N., 2021. Successful Higgs inflation from
combined nonminimal and derivative couplings. Physical Review D. 104(2). p.023530.
Kırca, M. and Özer, M., 2020. The impact of tourism demand on regional inflation in
Turkey. Journal of the Geographical Institute" Jovan Cvijic", SASA. 70(3). pp.241-254.
Meo, M. S. and et.al., 2018. Asymmetric impact of oil prices, exchange rate, and inflation on
tourism demand in Pakistan: new evidence from nonlinear ARDL. Asia Pacific Journal
of Tourism Research. 23(4). pp.408-422.
Page, S. J. and Connell, J., 2020. Economic impacts. In Tourism (pp. 356-374). Routledge.
Turner, H. C. and et.al., 2019. Adjusting for inflation and currency changes within health
economic studies. Value in Health. 22(9). pp.1026-1032.
6