Evaluate the effect of UK inflation on a niche clothing boutique in UK.

Inflation can be described as the constant tendency for price levels to rise in an economy. There are many factors involved which determine the overall effect of inflation on a business. Firstly, an increase in price levels may cause the prices of the raw material that the business uses, for example cotton or silk fabrics, to increase. This would in turn lead to increased costs for the business and therefore they would either have to increase the prices of their clothing or experience a loss in profit margin. Since the business is a boutique and sells 'niche' clothing, it is likely that the business has relatively inelastic price elasticity of demand and therefore the firm might have scope for increasing prices. Nevertheless, the likely overall effect is a decrease in profits for the firm. Another significant effect of inflation could be due to the government response to the said inflation. If the government increases interest rates in order to control the inflation this could make it more expensive for business to take out loans in order to expand or improve. Therefore, the clothing boutique might be able to invest less and experience lower profits in the future. On the other hand, the inflation could be beneficial to the firm if they are able to increase prices by a larger proportion than their cost increases- this will mean that the firm's profits increase.However, these effects depend on how large the inflation is and whether or not it is above the 2% government target. If the inflation is small then suppliers are unlikely to change the prices of the raw materials and the government will not have to take measures such as altering the monetary policy and increasing interest rates. In addition to this, if the suppliers for the boutique are not based in the UK, then their prices are will not be effected by UK inflation. The effects of the inflation also largely depend on the customer base for the store. If the store has a high level of exports, and a large proportion of it's customers are not in the UK, then the inflation will probably mean that demand for the products decreases because the incomes of customers abroad are not likely to be linked to inflation in the UK. On the other hand the income of UK customers is more likely to change in line with inflation therefore even if the company do increase the price, this might have little effect on the customers. Moreover, the effect on firms would depend on the cause of the inflation. If it is cost-push inflation, then the outcome would in fact depend on to what extent the firm can pass cost increases on to consumers. If the inflation is demand- pull however, this suggests that the economy is in a period of growth meaning more demand for the firm and higher profits.