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Introduction of The report concluded the facts about the Inflation and its impacts on the Tourism Industry
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Inflation refers to the increase in the prices of goods and services and the value of currency decreases in an economy over a period of time. Inflation results in a decrease in the purchasing power of money which means now consumer buys fewer goods in the same amount of money as compared to earlier. Inflation in an economy is determined by the help of consumer price index of the economy. The consumer price index is an index which shows then average change in the prices paid by consumers over a period of time. In august 2022, the consumer price index of UK was 123.1 and the rate of inflation was 9.8% which is much higher than the previous year rate that is 3.20%.
There are various factors that cause inflation in which demand pull and cost push inflation which are the most common inflation factors. However, with the affect of time the factors of inflation are also changes and becoming more complex (Bernanke, et.al 2018). Second important factors of inflation is cost push inflation, this situation occurs when the price increase when the cost of wages and material rises. There are various other factors that cause inflation like increased money supply, devaluation, interest rates, change in policies and regulations, and global events that affect the economy of country. This report highlights the facts about identify solutions for tourism companies to help them overcome the impact of the inflation. This report helps in understating how the inflation is measured in an economy and impact of the inflation on small medium size companies. To develop the understanding of the impact of inflation on SME, a detailed study of challenges faced by the tourism industry is done in the report.
The measured impact that inflation has had on SME’s
Inflation is rise in prices which further refers to decline of power to purchase over period of time. It is measured as the rate of change in prices, the most common indicator of measuring inflation is the Consumer Price Index (CPI). CPI measures the change in percentage in the price of goods and service used up by households. The total number of tourist visits in the Uk is 37.9 million in the year 2018 which is less than the year 2017. The loss is predicted about GDP of 4.2% overall in 12 months if there is any possibility of a shut down in global tourism.
In the UK, it is called the Harmonised index of consumer prices (HICP). The HICP measures inflation on basis of the change in the price of 700 different goods and services, this information is gathered from 120,000 different retail outlets. Earlier than CIP, inflation is measured by the retail price index (RPI). There is one main difference between RPI and CPI, the first one uses the geometric mean of prices and the other one uses the arithmetic mean of prices (Barkan,et.al 2022). As the supplies cost fluctuated from 45% to 40% the SMEs in UK felt the pressure of inflationary from last few months. The leaders and managers in businesses were constantly in struggle with the macro economical issues which impact dominantly in the working skills of the organizations.
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HICP basket and weights
Source: Federal statistical office, 2021
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Statistics of tourism industry
Inflation affects the overall economy its impacts are more visible in to small and medium-size enterprises (SMEs). In the UK, SMEs refers to a company with less than 250 employees and which has a turnover of fewer than 50 million euros or a balance sheet of not more than 43 million euros. In 2021, There were 5.6 million small and medium-sized enterprises in the UK, which forms 99.9% of the UK businesses. SMEs in tourism industry are looking thoroughly at expenses as they navigate higher inflation (Victor et. al. 2021).
UK’s tourism industry has increased their prices rapidly throughout 2021, amidst rising demand of staycation which could discourage British Tourists in 2022. This all results in lost of all opportunities for all SMEs in tourism, which all have a great opportunity to increase their buisness and add value that would help in attracting domestic tourists (Athari, et. al 2018).However all these overinflated price push out all the SMEs from the market, because domestic tourists are now more attracted to foreign countries (Cornea?Madeira and Madeira, 2022). The major cause of imapcts on inflation in tourism industry in the current pricing strategies which are not suitable for the SMEs to attract more tourists. In 2022, August, the CPI of passenger travel by air in the UK rise by 40.3% as compared to previous year. This was the high-pitched price increase recorded in tourism industry in the UK in month of august. On the other hand hotels, inns, and motels also recorded with an drastic inflation rate in 2022, with the CPI growing to 9.9% over previous years.
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UK inflation
(Source: Race, 2022)
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Impacts of inflation on the tourism industry
Inflation have positive as well negative impact on an economy. There are various negative impacts of a high rate of inflation in the economy, it includes loss in value of money, increase in the rate of interest, increase inequality, increase in the cost of living, increase in speculation investments, etc. the major effect of inflation is decrease in the purchasing power of the people and increase in the interest rates in the economy (Pektas and Unluonen, 2020). Inflation and interest rate are positively related, that means if there is an increase in inflation than the interest rate will rise and vice versa. On the other hand, a slow rate of inflation is good for an economy. The positive impact of inflation includes more employment, higher level of investment, more production, better investment returns, etc. The example of tourism company Verdant Leisure Holiday Park is taken to explain the affects of inflation which used a hybrid model and conventional demand-pull theory to overcome inflation in the UK.
Inflation has impacted the tourism industry in both ways positive and negative which depends on changes and effects of inflation. The impacts are as follows:
Positive impact
After the pandemic the people are more involved in in travelling than ever, because of that the prices of all airlines, hotels, motels, and inns are increased which is beneficial at the time of inflation for the economy of the UK. All SMEs in tourism have great opportunities to attract tourists with all their unique ideas because of pandemic tourists prefer to have an healthy travel (Lim and Sek, 2015). Because of inflation and rise in the prices of tourism industry investors are also looking for doing more investments, which influences the major positive impacts for the SMEs.
Negative impact
The High and variable rates of inflation impose major costs on economy of the country. SMEs, workers, and consumers are required to account for the effects of general rising prices (Akinsola and Odhiambo, 2017). Because of increase in airlines tickets prices has also affected the price of fuel which causes negative impact of inflation. Inflation also affects the prices of other goods and service which are related to the tourism industry like food sector, fuel, income of people, etc.
Conclusion
The report concluded the facts about the inflation and its impacts on the tourism industry. It discusses about the typical impacts that inflation have on the tourism industry, positive and negative both. Inflation refers to the increase in the prices of goods and services and the value of currency decreases in an economy over a period of time. Inflation waves through the economy in unlike ways and different time, affecting business in several ways. The immediate impacts of inflation on the tourism industry are no tourists visit because of high prices of alternative things that are related to tourism. An immediate shortage occurs due to bidding higher prices, no income source, etc this all factors put pressure on small business. And because of this pressure some of the tourism companies do not survive in market, they are unable to meet expense of staying in market.
Due to the sharp rise in global inflation, the holiday park of Verdant Leisure will face difficulties. Inflation causes a rise in the prices and because of which the company has to increase the charges and this influences the travellers to revise their travel plans. In August 2021, the Consumer price Index used to calulate the benefits of federal payments and living costs increases up to 9.9%.There are several majors for tourism industry that will help to manage inflations impacts. The first one is to strengthen pricing power of business, as affected by inflation price rises unexpectedly which distracts the customers. By improving pricing strategy company can overcome impact of inflation on company and helps in achieve desire goals.
The next important major to overcome inflation is to forecast the inflation scenario and plan for it in advance this strategy will help company to manage impacts of inflation. Company can pre plan solution to impacts of inflation, these plans or strategies involving various offers and benefits to attract customers. Companies can also prefer to take loans to face expenses and overcome crisis in situation of inflation, with the help of loan amount companies can work on their marketing and plan on coming up with better ideas to overcome impact of inflation.
Referencing
Akinsola, F.A. and Odhiambo, N.M., 2017. Inflation and economic growth: A review of the international literature.
Athari, S.A., Alola, U.V., Ghasemi, M. and Alola, A.A., 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.
Barkan, O., Benchimol, J., Caspi, I., Cohen, E., Hammer, A. and Koenigstein, N., 2022. Forecasting CPI Inflation Components with Hierarchical Recurrent Neural Networks. International Journal of Forecasting.
Bernanke, B.S., Laubach, T., Mishkin, F.S. and Posen, A.S., 2018. Inflation targeting. In Inflation Targeting. Princeton University Press.
Cornea?Madeira, A. and Madeira, J., 2022. Econometric Analysis of Switching Expectations in UK Inflation. Oxford Bulletin of Economics and Statistics.
Forbes, K., Kirkham, L. and Theodoridis, K., 2021. A Trendy Approach to UK Inflation Dynamics 1. The Manchester School, 89, pp.23-75.
Lim, Y.C. and Sek, S.K., 2015. An examination on the determinants of inflation. Journal of Economics, Business and Management, 3(7), pp.678-682.
RaceM, 2022. UK inflation rises at fastest rate for 40 years as food costs jump. (Online) https://www.bbc.co.uk/news/business-61891649 accessed on 26.09.2022
O’Neill, R., Ralph, J. and Smith, P.A., 2017. What Is Inflation?. In Inflation (pp. 21-43). Palgrave Macmillan, Cham.
Pektas, S.Y. and Unluonen, K., 2020. The evaluation of tourism in Turkey in terms of inflation. Journal of Tourismology, 6(1), pp.111-132.
Victor, V., Karakunnel, J.J., Loganathan, S. and Meyer, D.F., 2021. From a recession to the COVID-19 pandemic: Inflation–Unemployment Comparison between the UK and India. Economies, 9(2), p.73.
Zhang, C., Rao, S., Gueroudji, A., Bigot, J., Raffin, B., Mondal, A. and Priyakumar, U.D., HiPC 2021.
