Economic Factors on Business Function

Inflation, IR, Skilled labour availability, Unemployment Rates

Inflation

Sustained increase in the general price of goods and services

How is inflation measured

As a % per annum using the consumer price index (CPI)

Current inflation rate

3.7%

Ideal level of inflation

• 2-3% ideal

• less = economy weak

• more = economy overheated

Impacts of inflation on consumer spending

Revenue will decrease as consumers lose purchasing power

Interest rates

The cost of borrowing money. usually as a % of the amount borrowed per year

Current cash rate vs target

4.1% — target 3.85%

Cash rate

The interest rate that banks charge each other for short-term loans (usually overnight).

How do high interest rates impact businesses

High Interest rates → Loans more expensive → less disposable income → incentive to save → less consumer spending → less profits

Aim of increasing interest rates

to slow down the economy (inflation) by making it more expensive to borrow money, therefore people spend less

Supply of labour

The amount of people availiable to complete jobs required by a business

How does a shortage of skilled labour effect businesses?

• Decrease in Productivity

• Increased Operating Costs

• Pressure on Existing Staff

• Challenges in Innovation

• Have to increase wages to attract workers

How can businesses combat labour shortages?

• Increase pay

• Offer additional benefits

• Reward existing employees

• Limit business hours

Unemployment

People who are not in a paid job but are actively looking for work

Structural unemployment

when the structure of the economy changes, and workers can’t easily move into new jobs.

Why does structural unemployment happen?

• Industries decline (e.g. manufacturing jobs disappearing)

• Technology replaces jobs (automation)

• Globalisation shifts jobs overseas

• Workers don’t have the right skills or training

What causes rising unemployment?

• Economic contraction

• high interest rates

• new technology

• seasonal changes

High unemployment effects

• Low consumer spending → fewer sales

• Lower profits → businesses struggle

• Less investment → expansion slows

• Cheaper labour → easier to hire, lower wages

Current unemployment rate (as of Feb 2026) vs target range

4.3% vs 4.25%–4.5%