MGBBT0FYP: Investigating Inflation's Impact on the Tourism Industry

This research project investigates the impact of inflation on the tourism industry, particularly focusing on the UK economy. It examines both quantitative data, such as the CPIH rate, and qualitative aspects, including the effects of inflation on consumer behavior and tourism businesses. The report highlights the challenges posed by rising prices and decreased purchasing power, especially after the COVID-19 pandemic. It also explores potential solutions for tourism operators to mitigate the negative impacts of inflation, such as absorbing costs and offering complimentary services to maintain customer engagement. The study aims to provide insights into managing inflation's adverse effects on the tourism sector.

Research Project

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................2
Quantitative research on inflation................................................................................................2
Qualitative research on Inflation .................................................................................................4
CONCLUSION ...............................................................................................................................5
REFERENCES................................................................................................................................7
APPENDIX......................................................................................................................................8
Gantt Chart...................................................................................................................................8

INTRODUCTION
In a market economy prices of goods and services can always change because market forces
keep changing which fluctuate the prices of commodities in the market. Inflation occur when
these prices rise gradually. In simpler words we can say that inflation reduces the value of
countries currency over time. Inflation can occur when there is imbalance between demand and
supply of money or increase in tax rates on products and services. When a country face inflation
the price of commodities rise and value of currency reduces in that country. A unit of currency
buy less goods or services after inflation which has its worst impact on consumers. Inflation
make it harder for common people to afford their basis needs for life. In such situation people
ask for increment in their pay scale. That's why government do their efforts to keep inflaton
under control. However a moderate rise in the inflation is considered as a good economy. A rise
of 2 to 3 percent can benefit countries economy. Different events can trigger inflation in an
economy but typically there are two factors an increase in production and an increase in demand
of products and services (Law and Soon, 2020). Economist divided inflation in two main types,
cost pull inflation and demand pull inflation. Cost pull inflation happen when the cost of the
commodities increase due to different reason like increase in production cost. This leaves the
demand unchanged but the supply of goods decreases due to higher prices. Demand pull inflation
occur due to the strong demand of products and services. When there is a wide increase of
demand in an economy the prices increase automatically. A short term increase of a demand is
not the concern but a long increase in demand can impact the economy and raise the cost of
products which causes inflation (Duca-Radu, Kenny and Reuter, 2021). This report will include a
research on impact that inflation can have on tourism industry. The report will provide the
solution that tourism industry can use to reduce the negative effect of inflation. Aims and
objectives of the research are mentioned below -
Aims
 To understand inflation and processes which related to inflation and how it impact on the
tourism industry.
 To identify solutions for tourism industry which can help them to reduce adverse effects
of inflation.
Objectives
 To analyse the negative impact of inflation on tourism industry in recent years.
1

 To highlight negative and positive effects of inflation on tourism industry.
MAIN BODY
Quantitative research on inflation
Inflation is a economic phenomenon which every economy in the world face at some point of
time. Demand and price of commodities rise in a economy as time goes and it cause inflation.
UK economy is suffering from inflation and we can observe the same by the following figure.
Figure 1 United Kingdom CPIH Rate
It can be seen that with the period of July 2021 to August 2022 there is a rise in the inflation at a
alarming rate. With the above statistics it can be analysed that there is a upwards trend as the rate
in July 2021 was 2.1 which recorded 8.8 in July 2022. This is alarming rise for the United
Kingdom. The data shows and inflation if effecting the UK economy.
Inflation in the UK has also changed the way people in UK purchase, high rise in the prices of
commodities reduces the purchase power of consumers. The CPI is one of the most popular
measure of inflation in an economy. It extend consumer price index and include measure of cost
associated with living in own home. From January 2021, the CIPH index show a increasing trend
2

in the price of goods that consumers in UK purchase for their households. This data help us to
understand that how inflation is impacting the common people in the UK economy. This also
impact tourism industry as the price rise increase their consumer's expenses also (Su, 2020).
Consumers saving began to drain in their household expenses, such scenario hampers their
capacity or will to travel spend on entertainment.
Figure 2 Office for National Statistics – Annual CPIH inflation rate
Above statistics is a proof that inflation is indeed present in the economy of United Kingdom.
One of the main reason for the rise of inflation is the damage done by the Covid -19 pandemic
which adversely effect almost every industry in the country. The tourism industry during the
pandemic almost stopped and price rise in the transport industry also effected travel and tourism
3

industry. Transport and tourism industry are interrelated and inflation is one of the factor which
effect both industry causing so much loss to the industry (Icoz and Icoz, 2019). The statistics
below support this argument because it display the impact of inflation and price rise on the
recreational services and transport service which are major supporters of tourism industry. Over
a period of 1 year from March 2019 to March 2020 the number of OS visits to the UK has
decreased almost 50% which shows that tourism industry is facing a downfall because of cost
push inflation in the tourism industry. The prices of holiday packages rise during the period
which caused UK tourism to be less attractive for customers. The industry is effected by inflation
and at present it is responding to inflation.
Figure 3 – OS visits to the united kingdom from December 2018 to March 2020
Qualitative research on Inflation
Tourism industry is one of the important pillar of an economy, GDP of developed and
developing countries are also dependent on tourism industry. The industry is volatile to price
because rise in price of services and products can influence consumers behaviour to travel. A
minute price rise can cause industry to face problems of less consumers. There are many
advantages and disadvantages of inflation for tourism industry. Existence of perfect rate of
inflation reflects a health economy as businesses can produce more because the prices are under
4

control and moderate inflation bring high demand from the market. After pandemic the demand
in tourism industry rise again and high demand causes prices to rise. Prices skyrocketed and
businesses seek to charge these prices from their customers which affect businesses negatively.
A moderate level of inflation can have positive impact on industry because it provide businesses
a chance to tackle their loss (Mahmoud, Abou-Shouk and Fawzy, 2020). Various companies
suffer loss during the pandemic and to manage that these companies increased the prices of their
packages and services. Inflation also benefit large scale companies to manage wages that they
are paying to their employees and managing the price of their services and products according to
the industry standards. But there are also many negative impact of inflation on the industry. The
inflation cause to decrease the profitability of the company in long run. One of the way inflation
impacted the tourism industry is by increasing the prices of the commodities which led
companies to increase the prices of their packages. Rise of inflation has increased the prices of
travel, airfare and other related services which directly impact on tourism industry (Law and
Soon, 2020).
CONCLUSION
Inflation in the United Kingdom economy is rising with an alarming rate from last few years
and the pandemic also helped it to rise. There are both positive and negative impact of inflation
on an economy. Global companies adjust their employees wages according to the market and
inflation help them to manage their wages and cost according to industry standards. But negative
impact of inflation can cause the industry to become less profitable because rise in prices of
packages influence consumers to travel less. The number of booking cancellations increased
significantly in the past few years which shows that the inflation is influencing consumers to
travel less. Tourism industry need to make some measures to tackle inflation and some of the
recommendations by which they can recover from the negative impacts of inflation are
mentioned below -
 Major issue which tour operators are facing is that they do not want that inflation effect
their business and they do not want their customers to pay more for the services. In case
when cost of arranging travel increases they need to increase their package prices. The
best way companies can use to manage the negative inflation is by absorbing the cost.
5

This can prevent consumers to cancel bookings as the final cost to tourists can remain
affordable to them.
 Another measure that companies can take is by pushing them to travel by offering them
variety of free or complimentary services. Which can make them feel that they are
receiving more by paying the increased costs. Rise in fuel prices cause them to increase
their prices and they should look for ideas which can influence consumers to travel more
and by providing additional services they can do the same.
6

REFERENCES
Books and Journals:
Duca-Radu, I., Kenny, G. and Reuter, A., 2021. Inflation expectations, consumption and the
lower bound: Micro evidence from a large multi-country survey. Journal of Monetary
Economics, 118, pp.120-134.
Icoz, O. and Icoz, O., 2019. Economic impacts of tourism. In The Routledge Handbook of
Tourism Impacts (pp. 95-108). Routledge.
Law, C.H. and Soon, S.V., 2020. The impact of inflation on income inequality: the role of
institutional quality. Applied Economics Letters, 27(21), pp.1735-1738.
Law, C.H. and Soon, S.V., 2020. The impact of inflation on income inequality: the role of
institutional quality. Applied Economics Letters, 27(21), pp.1735-1738.
Mahmoud, M., Abou-Shouk, M. and Fawzy, N., 2020. Exploring the Factors Affecting
Entrepreneurship in Tourism Sector. International Journal of Hospitality & Tourism
Systems, 13(2).
Su, X., 2020. Simulation of economic development of tourism industry based on FPGA and
machine learning. Microprocessors and Microsystems, p.103523.
7

APPENDIX
Gantt Chart
8