Inflation
Learn what inflation is, how to calculate the inflation rate and how your small business can manage rising costs.
February 2024 | Published by Xero
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- Inflation is the rate at which prices rise over time, so each euro buys a little less than before
- Inflation usually starts when demand outpaces supply or business costs rise, and expectations of future rises can keep it going
- Ireland’s Central Statistics Office publishes the official rate monthly, and the European Central Bank sets interest rates for the euro area
- You can protect your business by reviewing costs, watching margins, raising prices with care and keeping cash flow healthy
Inflation definition
Inflation is the rate at which prices for goods and services rise over time. As prices climb, each euro buys less, so the purchasing power of your money falls.
Picture a café owner who pays a bit more each month for the same milk order. Inflation measures that kind of squeeze across the whole economy. Some inflation is normal in a healthy economy, but a fast rise can put real pressure on small business budgets.
What causes inflation?
Prices rise when the balance shifts between what people want to buy and what businesses can supply. Economists usually group the causes into four main types.
- Demand-pull inflation happens when customers want to buy more than businesses can supply, so sellers raise prices
- Cost-push inflation happens when costs such as energy, wages or raw materials rise and firms pass them on
- Expectations-driven inflation happens when businesses and workers expect rising prices and raise prices or wage demands in advance
- Monetary inflation happens when the money supply grows faster than the output of goods and services
For a small business, cost-push inflation is often the easiest to spot. A supplier price rise or a higher energy bill lands on your costs straight away, before customers change how they spend.
What is the inflation rate?
The inflation rate is the percentage by which prices rise over a set period, usually 12 months. It’s reported as a single figure for the whole economy, yet different goods and services rise at different speeds.
Central Statistics Office (CSO) data shows Irish prices rose 3.4% in the year to June 2026, with energy up 9.3% and food up 0.6%. The energy figure covers electricity, gas and other fuels. If your business runs on energy, such as a bakery or a laundrette, your costs may climb faster than the headline rate.
How to calculate the inflation rate
You can work out the inflation rate for a single product or service by comparing its price at two points in time. Follow these steps.
- Note the old price and the new price for the same item
- Subtract the old price from the new price
- Divide the result by the old price
- Multiply by 100 to get a percentage
As a formula: inflation rate = ((new price − old price) ÷ old price) × 100.
For example, a coffee that cost €2.00 last year now costs €2.10. The calculation is ((€2.10 − €2.00) ÷ €2.00) × 100 = 5%, so the price of that coffee has risen by 5% over the year.
How inflation is measured in Ireland
The CSO publishes two inflation measures every month. The Consumer Price Index (CPI) is the national measure, and the Harmonised Index of Consumer Prices (HICP) uses an EU-wide method. The latest CPI release shows consumer prices rose 3.7% in the 12 months to August 2026.
The European Central Bank (ECB) sets monetary policy for the euro area, including Ireland, and targets 2% inflation over the medium term. The ECB tracks the HICP and can raise interest rates to bring inflation back down.
Why inflation matters to small businesses
Inflation changes what you pay suppliers and what your customers can afford to spend. In the Azets Ireland Q2 2026 Barometer, 67% of 156 firms cited inflation as a concern, with smaller firms (10–49 employees) reporting weaker pricing power.
Some effects can work in your favour. Assets such as property or stock can rise in cash value, and the real value of your debts falls as money loses value.
Most small businesses, though, feel pressures like these.
- Rising supplier and energy costs can squeeze your profit margin when prices can’t keep pace
- Rising wage expectations can push up your payroll costs
- Falling spending power can reduce sales, especially for businesses selling non-essential goods
- Higher interest rates can raise borrowing costs: the ECB raised its deposit facility rate to 2.50% from 16 September 2026
How small businesses can deal with inflation
Inflation is outside your control, but how your business responds is up to you. These steps can help you protect your profits while prices rise.
1. Review your costs
Start by going through every regular expense to see where your money goes. Look for savings on your overheads, such as renegotiating your lease or comparing supplier prices. Small savings across several bills add up over a year.
2. Monitor your margins
Check your margins every month so you can see when rising costs start eating into profit. When a product or service earns less than it used to, adjust its price or how you deliver it before the gap grows.
3. Raise prices strategically
Price rises go down better when customers understand them and see value in what you offer. Give loyal customers advance notice and consider flexible payment terms to make the change easier.
Alongside price rises, look for ways to increase revenue, such as selling more to existing customers or adding a higher-value service.
4. Manage your cash flow
Credit usually costs more when inflation is high, so aim to keep enough cash on hand to cover your bills without new debt. If you do need to borrow, compare lenders and terms before you commit.
Regular cash flow checks are a core part of managing business money, and they help you spot a shortfall early.
Keep on top of rising costs with Xero
When prices keep climbing, a clear view of your numbers helps you act early. Xero lets you track expenses and cash flow in one place, with bank feeds keeping your figures up to date.
Reports and business analytics help you see how rising costs affect your profit, so you can set prices with confidence. To see how it fits your business, get one month free on a Xero plan.
FAQs on inflation
These answers cover common questions about how inflation affects you and your business.
Who benefits from inflation?
Borrowers with fixed-rate loans can benefit, because they repay debt with money worth less than when they borrowed it. Businesses selling essentials often find it easier to raise prices in line with costs.
Is inflation good or bad?
Low, steady inflation is a sign of a healthy economy, because it encourages people to spend and invest now. It becomes a problem when it rises quickly or unpredictably, which makes pricing and budgeting harder.
What’s the difference between inflation and hyperinflation?
Hyperinflation is extremely rapid inflation, where money can lose much of its value in a short time. Ordinary inflation moves gradually, so businesses can adjust prices and contracts as they go.
What is deflation?
Deflation is when general prices fall over time. It can sound appealing, but customers often delay purchases while they wait for lower prices, which can slow sales.
How does inflation affect savings?
When your savings earn less interest than the inflation rate, their real value shrinks over time. Compare deposit accounts for any surplus business cash so it keeps more of its value.
Related terms
Learn more about inflation
Handy resources
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Price increases
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.