Economic Changes: Inflation and Exchange Rates (AQA A Level Business): Revision Note
Exam code: 7132
Inflation
Inflation is the general rise in price levels in an economy over time
The Consumer Price Index (CPI) measures monthly changes in the prices of a range of goods and services and compares these changes to earlier periods, calculating the rate of inflation
In the UK government, monetary policy focuses on achieving a 2% inflation rate and tasks the Bank of England to take steps to maintain this (e.g. raising the interest rate)
After several decades of relatively low levels of inflation, the UK has recently experienced rapidly increasing levels
High or fluctuating levels of inflation can be problematic for businesses for several reasons
Problems caused by inflation
Increased costs
Workers often demand higher wages to compensate for the increase in the cost of living
Suppliers increase the cost of raw materials and components
Utilities such as electricity become more expensive
Higher repayments on loans
Interest rates usually rise as the Bank of England uses the base rate as a tool to control inflation, making new and variable rate borrowing more expensive
Consumers change spending habits
Deters consumers from making significant purchases and they may reduce demand for usual lower priced wants too, e.g cinema tickets
Purchasing on credit becomes more expensive
International competitiveness
Where domestic inflation rates are higher than those in other countries:
UK businesses are less likely to be competitive and lose sales
Imports of overseas competitors are likely to cheaper than domestic goods
Uncertainty
Occurs when businesses cannot predict prices even in the short term
Survival may need to become the key business objective until stability returns
Spending and contract decisions are likely to be delayed
Exchange rates
The exchange rate is the value of one currency expressed in terms of another
Exchange rates are an important economic influence for businesses that import raw materials and components and for businesses that export their products
Exchange rates fluctuate for a range of reasons, including
Changing demand for a currency
Economic growth
Changes to interest rates
The impact on business of changes in currency values
Change to currency value | Impact on exporting businesses | Impact on importing businesses |
|---|---|---|
An increase in the value of the £ against other Currencies (appreciation) |
|
|
A decrease in the value of the £ against other currencies (depreciation) |
|
|
Case Study
Exchange Rate Impact on BrewCraft Ltd
BrewCraft Ltd is a UK-based premium craft beer producer located in Yorkshire
It exports to EU countries, particularly Germany and France
It also imports hops and specialty brewing equipment from the US and New Zealand
Background: Depreciation of £ in Q2 2025
In early 2025, the value of the pound fell sharply against both the euro and the US dollar due to weak UK economic growth and falling interest rates
Business Impact
Positive impact on exports
BrewCraft’s beers became cheaper for European customers, leading to a 22% increase in overseas sales within 3 months
The company raised euro prices slightly without affecting demand, boosting profit margins
Negative impact on imports
The cost of imported hops from the US and New Zealand rose by 15%
BrewCraft temporarily switched to UK-based hop suppliers to manage costs, despite minor compromises on flavour profile
Strategic Business Adjustments
Introduced a “Limited UK Edition” line using only British ingredients to appeal to local consumers and reduce import reliance
Agreed future currency purchases with its bank at an agreed rate to stabilise input costs
Outcome
Net profits increased by 8%, mainly due to export gains
Customer base in France and Germany grew by 30%
UK customers appreciated the local-sourcing shift, increasing domestic brand loyalty
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