How and when do business adjust for inflation?


How and when do business adjust for inflation?

In: Economics

They don’t adjust for “inflation”.

Inflation is general rise in prices. Now some businesses might easily be able to pass prices onto consumers. These companies adjust prices as and when their input prices go up. Inflation is really not a bother to these people

Then there are companies who are in very competitive spaces. These cannot pass prices onto customers as competitors might not thus undercutting them. These folks are very sensitive to inflation.

Employees get raises. Vendors prices rise. To maintain same margin on product, your product price has to rise.

Companies raise prices from time to time. They give cost of living increases to their employees. Inflation is a gradual, small thing… but businesses tend to adjust more irregularly. So they may raise prices 5% every 2 years rather than constantly raising a nickle here, dime there.

Businesses adjust to it many different ways. One of the most interested is in consumer products and the way they hide their inflation.

Not long ago, the standard size for a can or bottle of something (not soda) in the grocery store was 16 oz. But if you look now, the price hasn’t changed but most can sizes are now 12 oz or 14oz.

That’s the product of inflation by either the manufacturer, the retail grocer, or both.

Some businesses are constantly changing their prices to reflect changes in underlying costs (e.g. gas stations). Most don’t do this and instead change prices very occasionally. A leading explanation for this in economics is “menu costs”. The name comes from the idea that if a restaurant wanted to change its prices every day, it would also need to print new menus every day. It’s very possible that the “menu cost” of changing prices outweighs the greater revenue a firm would get from just raising prices by 1 or 2 cents. Instead, they space out their price changes to avoid paying menu costs too often.

Another thing to consider is that most consumer products are not bought directly from the manufacturer. Instead, the manufacturer is selling their product to a retailer, and the retailer chooses their own price to post on the shelf. Retail pricing is its own complicated problem full of sales, coupons, and loss leaders. Retailers don’t necessarily just apply a constant markup to whatever they paid the manufacturer. Therefore, the manufacturer may actually be changing the price they charge the retailer, it just doesn’t immediately show up for you.