Spotlight on GCSE Business: Inflation
It was announced this week that inflation in the UK rose to 3.1% for the year to August 2026. This is well above the Bank of England's target inflation rate of 2%. It is widely expected that inflation will rise again in the coming months.
But what is inflation? And how might this rise in inflation affect businesses?
Inflation
Inflation essentially means prices are rising. Prices are expected to increase over time but if they increase too much, that can place unsustainable pressure on consumers and businesses.
As mentioned, the annual UK rate of inflation from August 2025 to August 2026 was 3.1%. This means that, on average, prices in August 2025 were 3.1% higher than they were in August 2025. Buying a pint of milk or a loaf of bread costs us all more in 2026 than it did in 2025.
The following graph shows the inflation rate in the UK from August 2020 to August 2026. It shows that for the majority of that six year period, the inflation rate has been above the Bank of England's target inflation rate of 2%. Although a rise in the inflation rate to 3.1% may be unwelcome, it is significantly lower than the 11.1% inflation rate back in October 2022.
It's important to recognise what the changes in inflation rate and this graph mean. Yes, the inflation rate has reduced from 2022. However, this does not mean that prices have reduced. Prices have still risen - they have just increased less quickly.
How does inflation impact businesses?
For a business, inflation can affect:
Costs: Raw materials, wages, rent, energy and transport may become more expensive.
Prices: A business may raise prices to cover higher costs.
Demand: Customers may buy less, especially non-essential goods.
Profit: Increased costs and reduced demand may result in a reduction in profit.
A small café may face increased costs with their electricity bills increasing and the cost of raw materials, such as coffee beans, rising.
What does the café owner do? Well, they might choose to increase the prices of a latte to cover their increase in costs.
What impact might this have? Some customers may continue buying their latte but other customers may cut back - remember inflation will be affecting the consumers too, such as with their own home electricity bills increasing, so they will have less disposable income.
Should the café owner try to pass on the increased costs to the customers by raising their prices? Or should they take the hit of the higher costs themselves and accept a lower profit?
The answer will depend on the business and the broader economic climate. It is not an ideal time to increase prices when consumers are struggling with inflation rises and the 'Cost of Living' with less income to spend after paying for their essentials. For many businesses, it may mean a compromise of covering some of the costs themselves and increasing their prices a smaller amount.
Inflation may also affect business decisions around stock. If the café owner expects supplier prices to rise next month, it may buy more stock now at the current lower price. That could protect the business from higher prices later, but it also ties up cash. If demand then falls, the business may be left with too much unsold stock which may become out of date and unusable.
GCSE Business: Inflation
In GCSE Business (Edexcel) we explore inflation as part of the economy. The economy is an external influence that impacts a business but is outside the business' control. Inflation is closely linked with other factors including consumer income and interest rates.
It is important to be aware of the potential impact of inflation on businesses and their decisions.
Key Terms
Economy | The system by which money is produced. |
Inflation | An increase in the general level of prices. |
Interest rate | The annual cost of borrowing or reward for saving expressed as a percentage. |
Stock | Raw materials to make a product or finished goods waiting to be sold to customers. |
Free downloadable Key Terms document to support GCSE Business (Edexcel) is available under Business Resources.
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