Term
Inflation
A rise in the general price level so that the same money buys less. In Slovakia the Statistical Office measures it as the year-on-year change in prices, and companies feel it in their costs, pay demands and contract indexation.
Updated
What it means
Inflation is a rise in the general price level in an economy, meaning the same amount of money buys fewer goods and services. In Slovakia the Statistical Office measures it mainly through the harmonised index of consumer prices and expresses it as a year-on-year percentage change.
In the euro area monetary policy is decided by the European Central Bank, which aims for inflation of around 2 % over the medium term. When inflation is high the ECB raises interest rates, making loans more expensive and cooling demand. The National Bank of Slovakia is part of this system.
For companies inflation means more than dearer purchases. It changes the value of money over time: a receivable due in a year will buy less, debt loses real value, and profit shown in the accounts may be overstated if inventory and assets are carried at old prices.
How it works in practice
When inflation is high, we recommend recalculating costings and price lists regularly, not once a year. Long-term contracts should include an indexation clause linking the price to the consumer price index, which is already standard practice in leases.
Inflation feeds into wages as well. Employees expect pay rises, and the minimum wage increases by a formula tied to the average wage. When budgeting for next year it is sensible to plan for payroll costs rising at least in line with expected inflation.
On the financing side, inflation affects interest rates. Floating-rate loans linked to EURIBOR become more expensive when the ECB raises rates. When planning investments it is worth considering fixing or hedging the interest rate.
What to watch out for
A common mistake is keeping a large amount on a current account earning no interest during high inflation. A reserve is necessary, but its real value falls quickly. Part of the spare cash is sensibly placed in term deposits or short-term interest-bearing instruments.
The second mistake is not noticing that revenue growth is purely inflationary. If revenue rose 8 % while inflation was 10 %, the company is actually selling less. When assessing results, compare volumes and real indicators too, not just euros.
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