It was announced on Tuesday that inflation fell below 1% in December 2013 and is likely to decrease even more so over the next few months. It is uncertain whether or not the rate will dip below zero, but businesses need to be adjusting to the reality of deflation.
Matthew Lynn explains the impact that deflation could have on businesses, including…
- Revenue is the main metric used to measure companies, and with deflation, expecting an increase in sales year on year is unrealistic. Firms should be aiming to keep up with the market, and holding steady profits/revenue would be a positive outcome.
- With falling prices, interest rate rises are unlikely.
- Debt will be much more detrimental – people will begin to borrow less meaning negative consequences for lenders. The same goes for corporate borrowing.
- There will be a squeeze on government finances. With inflation, tax brackets got higher and money came into the government without them having to make any changes to policy. With deflation, expect the total opposite. Lower tax bands but no changes to real earnings.
- Investors will look to smaller companies in growing industries. Bigger companies are more likely to struggle with deflation.
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