How does inflation affect contractors?

The UK’s Retail Prices Index (RPI) increased to 3.1% from 3% in December, meaning the country is currently off target. The target was set at 2.3% in June 2012, but to date the country has failed to achieve this. The Consumer Prices Index (CPI) is also missing the target of 2%, as it has held at 2.7% for some months now.

If you are a freelancer, you might wonder just how these percentages will affect you. Changes in inflation are never good, as it is always preferable to stay on target, but as you can see this hasn’t been achievable in these tough economic times

What is inflation?

Inflation refers to the increase in prices for goods and services within an economy. There are a number of reasons why prices may rise, including the cost-push, demand-pull and bad monetary policy inflation models.


Cost-push inflation

This happens when the cost of supplies increases. This may happen due to shortages, such as in the 1970s when fuel became scarce and therefore became more expensive.

Demand-pull inflation

This kind of inflation occurs when supply cannot meet demand. This means that if there is high demand for a certain product, but not enough products for everyone, the costs will increase as a result.

Bad monetary policy

If a bank produces too much money it then loses its value and this leads to inflation.

These inflation models can raise the CPI and RPI, which can affect contractors throughout the country.

How are contractors affected?

Both CPI and RPI can affect contractors, as it can cost them more to purchase products for their business and they then need to increase their own prices in order to recoup their costs.

Are there any upsides?

Absolutely – contractors often have the upper hand when inflation is concerned. This is because they don’t have to contend with the problems that fulltime employees do. Many people working within larger companies will lose out on pay increases due to inflation, whereas contractors can negotiate their own rates to get the money they need.

A lot of companies are also looking to employ contractors now rather, as it can help them to keep costs down. This of course works out wonderfully for freelancers, as they can now call in as many jobs as possible ensure they are working to maximum capacity.

Talk of inflation usually has negative connotations, but that isn’t always the case for freelancers. While many will certainly see some changes to their work as a result of inflation and recession, many others may find that their business flourishes as a result.

This article was provided by Aurora Johnson on behalf of Nixon Williams, a contract accountant with many different services for freelancers including a take home pay calculator that is free to use.

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