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Many businesses have experienced a challenging past 12 months. The pandemic and resulting quarantine measures may be starting to ease, but companies still need to face the prospect of high inflation on the horizon. While inflation was on a downward trend previously, the Federal Reserve just raised its estimate of average inflation this year from 3.4% to 4.2%.
An increase in inflation has a number of effects on the economy. First and foremost, it erodes purchasing power as the cost of retail goods and services increase. It can also raise the cost of borrowing as interest rates increase due to increased risk. Inflation increases can also fuel further inflation, creating a feedback loop. As people spend more quickly to reduce the time holding depreciating currency, the supply of money is greater than the demand — so the purchasing power of the currency falls at an even faster rate.