Foundation Year Research Project
Introduction of Inflation is the rise in the prices of goods and services that affects the value of currency which results in decreases in an economy over some time
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Inflation is the rise in the prices of goods and services that affects the value of currency which results in decreases in an economy over some time. The pressure of inflation affects the costs which coupled up the demand and supply growth making the costs highly remarkable for the services. (Bernanke et. al. 2018). It is very easy to quantify the price of a single commodity like grains, fuel, utilities, etc at a particular time or over time but measuring the rate of inflation is a different task. Inflation objects are used to determining the overall impact of alteration in the price of a diversified set of services and goods. Inflation is calculated by measuring the categorising the goods and services comparing with the demand and supply. The reverse of inflation is deflation refers to decline in the prices of goods and services; deflation is the situation where the inflation rate falls below 0% (Fleckenstein et. al. 2017). Inflation is determined by the consumer price index of the economy. The consumer price index (CPI) is an index that shows the average change in the prices paid by consumers over some time.
A rise in the stock of money is the base of inflation, which can occurs through different factors that can cause inflation. Some of the important factors are interest rate, a high rate of interest affects the price of goods and service which results in inflation (Jaravel, 2021). The other most important factor that causes inflation is global events, global events like stock market activities, wars, and government policies also cause inflation which affects the prices of commodities. In all these cases the money ends up bringing down its purchasing power (Carmody et. al. 2021).
The main objective of the report is to classify and evaluate the best options to overcome inflation in the tourism industry. The report provides information about how inflation is measured and the impacts of inflation on SME companies in the tourism industry. The report highlights the facts and challenges positive and negative, faced by the tourism industry due to inflation. It also provides solutions that are proven to ease the negative impacts of inflation on the tourism industry.
Identification and Statistics Evaluation of Inflation
Classification of inflation
Inflation refers to percentage change in value of the price of goods and commodities. It happens on a disparity between the demand and supply of money, variations in production and distribution costs, and upsurges in taxes on goods and services (Malmendier and Nagel, 2016). Mechanisms that drive inflation are classified into three categories which are as follows:
(Source: Nasrudin, 2022)
Demand-pull inflation – it is the situation where a rise in the supply of money excites demands for goods and services to rise further quickly compare to the economy's production measurements (Schwarzer, 2018). This situation happens when the demand for several goods and services is more complex than its economic abilities to fulfil the market demand.
Cost-push inflation – it is the outcome of increase in prices of human resource working as compare to the production procedure inputs. This situation occurs when the price increases when the cost of wages and material rises (Berry and DeRose, 2015). These costs are forwarded to the customer. The customer has to pay high prices than the normal price of products.
(Source: Nasrudin, 2022)
Built-in inflation – is associated for the adaptive prospects or the awareness that people assume to be current inflation rates to remain in the future. In simple words the price of a commodity increases because of inflation and people may expect it to rise continuously in the future at the same rate.
The most common indicator for measurement of inflation is the Consumer Price Index (CPI), which evaluate the percentage variation in the price of goods and services expended by households. Inflation is calculated or measured in several forms depending on the country.
Statistical data of the tourism industry of the UK.
In the UK, inflation is measured with the help of Harmonised Index of Consumer Prices (HCIP). It measures inflation based on 700 different goods and services and all this information is collected from 1,20,000 retail outlets. Inflation causes impacts on the overall economy, its effects are visible on SMEs (Yapa Abeywardhana, 2015). According to data from the UK, SMEs are small companies that have less than 250 employees and a turnover of less than 50 million.
All the statistical data for calculating inflation are collected from various research and data of government, national, and financial statistics (Khoja,et.al 2019).
- Government statistics are collected with help of surveys, censuses, and from administrative records (Higham and Miller, 2018). These are the factual information recorded for statistical purposes by the government. The government statistics for the tourism industry is published in May 2022 showing an increase of 24%.
- The office of national statistics in the UK is the largest independent maker of all official statistics. It is accountable for gathering and publishing all the statistical information about the UK.
- The next important source of information is industry related statistics; these are the comprehensive group of stock and data on the assets and liabilities of all sectors of the economy. The industry-related statistical data in April 2022 shows the negative impact of inflation at 27 %.
UK's tourism industry has improved their prices by increasing them rapidly throughout 2021, with rising demand for staycation which might discourage British Tourists in 2022. These all facts lead to the loss of all opportunities for SMEs in the tourism industry. However all these overhyped prices drive out all the SMEs from the UK market and the major reason behind this is domestic tourists, which are now more attracted to foreign countries. In August 2022 the Consumer Price Index of passenger travel through air transport in the UK increased by 40.3% in comparison to the previous year (Holloway and Humphreys, 2022). This was the highest pitched price rise recorded in the tourism industry in the UK in august. The other sectors related to the tourism industry like hotels, inns, and motels were also recorded with a dramatic inflation rate in 2022, in which the CPI is raising to 9.9% over previous years (Gallego and Font, 2021). The calculation of inflation is done through the formula given below:
Percentage inflation rate = ( final CPI index value/ initial CPI value)? 100
Impacts of Inflation on the tourism industry
Inflation occurs when there is a continuous rise in the price level of goods and services (Hansen, 2016). Inflation has both negative and positive aspects on the tourism industry because some factors are proven to be beneficial for the tourism industry and some are harmful. The positive and negative impacts of inflation on the tourism industry are as follows:
Positive impacts of inflation
After the pandemic people are more into traveling than they were before, which is beneficial for the economy of the country. As mentioned above the CPI of the UK has increased because more tourists visit the country, and people are looking for more affordable places. For the economy of the UK and the tourism industry, it is the positive impact of inflation. Because of good inflation impacts on SMEs in the tourism sector investors are also looking for investing (Supriyadi and Kausar, 2017).
Negative impacts of inflation
With the cost of the tourism industry going up and customers spending power going down, tourists in the UK are delaying their plans. A decrease in the number of visitors because of an increase in price causes major impacts on the labor costs of the SMEs, the companies are not able to pay wages and because of inflation worker also demands higher pay. The main causes of inflation that negatively impact the country such as devaluation, demand-pull inflation, rising wages, inflation expectations, and cost-push inflation. For explaining in detail the impact of inflation in the ultimate travel company is taken as an example. The ultimate travel company faced many problems during the inflation period in the UK, as the COVID pandemic affect travel companies a lot. The company faced pressures from wage costs, rising food costs, labor shortages, and commodities, as the whole tourism country of the UK are facing the same problem. The real and major headache for the company is related to the labor and employee shortage in the business that caused a rise in prices, as on the properties of full services the labor costs exceeded 56%, and on properties of limited services, it exceeded 48%.
The report concluded the typical impacts that inflation has on the tourism industry, positive and negatives both. It also discusses the facts of measuring inflation and its impacts on tourism SMEs. Inflation refers to the rise in the prices of goods and services and the value of currency decreases in an economy over some time. The immediate impact of inflation on the tourism industry is no tourists visiting because of the high prices of things that are related to travel. Direct shortages in visitors occur due to bidding higher prices, no income source, etc. These all factors create pressure on small business which discourages them and SMEs do not survive in the market.
For explaining in detail the effects of inflation on the tourism industry, the ultimate travel company in the UK has to take into consideration. The company faced many problems during the inflation period in the UK, as the COVID pandemic had a huge impact on the tourism industry. It was like travel was banned for straight 2 years and the costs to maintain the tourism business increased, the company faced the loss of financial factors due to 2 years during the lockdown period. There are several majors in the tourism industry that will help to manage inflations impacts. The first one is to strengthen the pricing power of business, as affected by inflation price rises unexpectedly which distracts the customers. Strengthening the price will provide the company good competitive advantage and will also help in attracting customers. The next important major to overcome inflation is to forecast the inflation scenario and plan for it in advance this strategy will help the company to manage the impacts of inflation. Companies can also prefer to take loans to face expenses and overcome a crisis in the situation of inflation, with the help of loan amounts companies can work on their marketing and plan on coming up with better ideas to overcome the impact of inflation.
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