Comprehensive Analysis: Inflation's Impact on Tourism Industry

This report examines the impact of inflation on the tourism industry, focusing on the UK context. It begins by defining inflation and outlining events that lead to it, emphasizing the negative effects on SMEs. The study employs quantitative research to analyze the inverse relationship between GDP growth and inflation, highlighting the sector's sensitivity to rising prices. The report further explores how inflation affects various aspects of the tourism industry, including flight costs, accommodation, and holiday packages, which impacts customer spending. It then proposes solutions to mitigate the negative effects of inflation, such as contractionary monetary policy, cost reduction strategies, and fiscal policies. The conclusion summarizes the impact of inflation on the tourism industry, emphasizing the need for companies to manage costs and adapt to changing economic conditions. The report includes references to academic journals, online resources, and provides a comprehensive analysis of the subject.

Inflation

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
Concept of inflation.....................................................................................................................1
List of the events that can lead to inflation..................................................................................1
Aim and objective of research.....................................................................................................2
Main body........................................................................................................................................2
Quantitative research...................................................................................................................2
To analyse impact of the inflation on tourism industry...............................................................3
To determine solution for minimizing negative impact of inflation on tourism industry...........4
Conclusion.......................................................................................................................................4
REFERENCES................................................................................................................................5
Online..............................................................................................................................................5
Appendix..........................................................................................................................................6

INTRODUCTION
Concept of inflation
Inflation is defined as the concept of rising in prices of goods and services within an
economy for a specific period of time (Breinlich and et. al., 2022). During inflation the prices of
almost every good and services within an economy raised and due to increase in price the
customer's purchasing power and will get declined because they prefer to spend more on
essential goods than normal goods. On the other hand, during inflation most of the customers
also prefer to save money for future use and they did not spend on normal goods. In most of the
countries, central bank make efforts to control the inflation rate. The value of currency unit get
decline in case of inflation.
List of the events that can lead to inflation
Interest rate and inflation rate are tend to move in same direction because interest rate is
the main factor which is used by reserve banks of nations to control the inflation. Interest rate is
that rate which is charged by lender from borrower for money lending. Rising money supply in
the economy will raise the inflation rate (Gocer and Ongan, 2020). When interest rate are low
then people tend to use banking facilities more and borrow money from banks and spend more in
businesses and their livelihood. When people spend more in markets then demand increases and
when demand continuously increases then a time will come when demand will cross the total
supply of the products and services. Hence, the manufacturer will set higher prices for their high
demanded products. This is how interest rates leads to inflation within an economy. On the other
hand, rise in the cost of raw material and labour wages also leads to inflation. When the cost of
raw material increases and labour cost increases then automatically the overall cost of
manufacturing a product also increases and hence the price of the money is set to cover all
occurred cost plus profit margin. Hence, in case increase in the prices of raw material will tend to
increase in the prices of final goods and services which lead to inflation. Global events like
increase in the prices of imports and exports also lead to increase in inflation. For example, a
good cost $20 and when it is exposed to another nation then it cover $25 of cost including all
custom duties and export charges. Hence, the price of the final product will raise because the
company have to include the export charges in the product profit margin.
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Aim and objective of research
Aim- To determine the impact of inflation on tourism industry and implementation of effective
solutions to mitigate the negative impacts.
Objectives-
 To identify the positive and negative impact of inflation for UK tourism industry.
 To determine effective alternatives of solutions to mitigate negative impact of inflation
on UK tourism industry.
Main body
Quantitative research
SME are those companies which are impacted most commonly by increase in inflation
rate in UK. According to a report, almost 85% of small enterprises are suffering high inflation
rate of UK. Inflation and deflation is common terms which every economy have to face, hence,
the companies are required to prepare them self for such situations (Cornea‐Madeira and
Madeira, 2022). It is essential for companies to analyse how inflation can impact their
organisational growth and what all strategies they can opt to overcome the situation. It is not
always necessary that inflation rate is harmful for the economy, even according to reserve banks,
extreme low level of inflation can also provide harm to a country by increasing in circulation of
money. Since COVID 19 pandemic, the companies have to face issues from inflation and
government restrictions. Most common ways which can be adopted by companies to overcome
the inflation is to cut down their cost effectively.
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Interpretation- From the above graph it is interpreted that GDP growth and inflation have
reverse relationship which means when inflation raises growth of economy will decline and
when inflation rate is low then GDP growth is high. SME plays a important role in maintaining
GDP of an economy, hence, it is clear that inflation impacted the growth of SME of an economy.
To analyse impact of the inflation on tourism industry
Inflation have high impact on tourism industry. Due to inflation all the prices of goods
and services goes up, same happen with tourism industry where the prices of tourism services
and holiday packages increases and customers are commonly price sensitive which may change
their plan and avoid to use travelling facilities (Adeosun and et. al., 2022). Due to inflation, the
charges of flights increases, prices of accommodation services, restaurant services, taxes all
increases and due to this overall package of holidays enhanced. On the other hand, the income of
customers remain same as earlier. Hence, this is tough for them to choose high priced holiday
packages over other essential goods and services.
As per the point of view of Patrick Whyte (2021) UK Customer Price Index (CPI) rose by
3.2% (Whyte, 2021). CPI is the measurement tool which is used to measure the average
expenditure spend by customers in market to enhance their standard of living. This article shows
that the income of customers has increased and their spendings in market also increased but then
also they prefer to buy those products and services which are having low prices. The main reason
is to save income for future use. Due to inflation when prices of all goods and services including
tourism services goes up then customers prefer to avoid spending on their entertainment
activities and save their income for healthcare facilities and for essential goods only.
To determine solution for minimizing negative impact of inflation on tourism industry
As per the point of view of Rick Yvanovich (2022) there are few of the which can be
adopted by government and SME's to manage their inflation period effectively. These strtaegies
are mentioned below-
 Contractionary Monetary Policy- Monetary policy is one of the most popular way of
controlling inflation of an economy (Khan, 2020). By increasing interest rates by bank,
the customers prefer to keep money with them self and supposed to spend in market.
 Reduction in cost- If SME need to survive in inflation period then they are required to
minimize their cost by reducing the wages of their employees and mitigating the
spending on unproductive or low productive activities (Yvanovich, 2022).
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 Fiscal policy- Government basically higher the income tax rates which further lower the
demand and inflation within an economy.
Conclusion
From the above information it is concluded that inflation is the rate of increase in prices
of goods and services within an economy for a limited period of time. Due to inflation, almost
every organisation in each industry get effected. In context of tourism industry, they impacted
both positive as well as negative from inflation. Due to inflation the holiday packages which is
offered by companies to their customers get enhanced and due to this increase in prices of their
services the customers prefer to switch their needs and wants to travel from one place to another
for their entertainment purpose. This will further reduce the profitability of the tourism
companies. On the other hand, few of the customers have to travel due to business purposes like
attending meetings and many others. Such kind of tourism customers did not bother about
inflation and they still use high travelling packages. This will help the company to earn from few
of their customers in inflation period.
There are various kinds of solutions which can be adopted by government as well as
SME's to manage the inflation rate within their country. In context of government, they must
adjust their fiscal policy and monetary policy to control inflation. In context of SME's as well as
large organisations, they must control the cost by minimizing their spending on unnecessary
activities. They are also required to make their employees understand and influence them to
work for little low salaries as earlier and when the situation comes in control then the company
will pay them all those part of their salaries which are cut down during inflation period to control
the cost. Controlling cost will further help the companies to offer their holiday packages in low
prices as compared to their competitors. For example, Jet2holidays which is a popular company
in tourism industry have used the strategy of cutting down their cost in inflation period so that
they will maintain their cost low to offer low holiday packages to their customers. Secondly, this
company also focuses on those customers who have to travel for their business purpose. Such
kind of customers can pay even more prices to fulfil their needs and wants.
REFERENCES
Books and Journals:
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Adeosun, O.A. and et. al., 2022. Uncertainty measures and inflation dynamics in selected global
players: a wavelet approach. Quality & Quantity, pp.1-36.
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.
Breinlich, H. and et. al., 2022. The Brexit vote, inflation and UK living standards. International
Economic Review, 63(1), pp.63-93.
Cornea‐Madeira, A. and Madeira, J., 2022. Econometric Analysis of Switching Expectations in
UK Inflation. Oxford Bulletin of Economics and Statistics.
Gocer, I. and Ongan, S., 2020. The relationship between inflation and interest rates in the UK:
The nonlinear ARDL approach. Journal of Central Banking Theory and Practice, 9(3),
pp.77-86.
Khan, S.U., 2020. Interest Rate and Inflation Nexus, an Application of Granger Causality Test
Empirical Investigation: A Case Study of UK. Saudi Journal of Business and
Management Studies, 5(01), pp.32-39.
Online
Whyte P., 2021. UK inflation hits 3.2% - what does this mean for hospitality sector? [Online]
available through:
<https://www.hospitalityinsights.com/content/uk-inflation-hits-3-2-what-does-mean-for-
hospitality-sector/>
Yvanovich R., 2022. What Are the Effects of Global Inflation on the Hospitality Industry?
[Online] available through:
<https://blog.trginternational.com/effects-global-inflation-hospitality-industry/>
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Appendix
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