How does deflation affect businesses?

What with talk of moats and tennis courts and disgraced Speakers dominating just about every media outlet, Smarta was beginning to have suspicions the expenses fiasco was a clever scheme whipped up by government spin doctors to make everyone forget about the recession and drive up business confidence.

“Once the expenses thing blows over,” we imagined the government thought, “we can start anew and deny the recession ever happened in the first place. Perhaps we even blame it on Michael Martin.”
If that was their logic, it doesn’t seem to be working very well – today more bad news was announced (albeit quietly): the UK has slipped further into deflation, with the Retail Prices Index (RPI) dropping by 0.8% to -1.2%.

The Office for National Statistics, which gathers the figures, said the drop was driven by lower electricity and gas prices, and cheaper food costs.

We’ve heard a lot of talk about inflation (very bad) and deflation (worse) throughout the recession – but if inflation means you have to raise wages, doesn’t it mean deflation will be good for your business?
Not necessarily. It’s true suppliers may look to drop their prices in line with falling inflation rates, but you may be forced to cut your own – and staff won’t take very kindly to a cut in wages.

Cutting prices is a bad idea, though. We’ve quoted him before and we’re sure we’ll quote him again, but Pimlico Plumbers founder Charlie Mullins’ assertion that price-cutting during a recession is ‘suicidal’ during our interview with him was pretty accurate.

Instead of cutting prices, look at ways of adding value to your offering to justify what you charge – by adding a free gift or a free support package, for example. Now is the perfect time to invest in training for your staff to make sure you’re giving the best possible customer service.

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