Final answer:
As inflation continues, the prices in a static annual catalog could seem relatively cheaper, potentially boosting sales if consumer wages keep pace with inflation. Conversely, if wages do not increase, customers might reduce spending, impacting sales negatively. The business should monitor inflation and consider catalog updates to manage profit margins.
Step-by-step explanation:
Impact of Inflation on Retail Mail Order Business Sales
When the central bank increases the money supply, causing inflation to average one percent each month, there are a few potential impacts on a retail mail order business that produces a single catalog for the entire year. Firstly, as the year progresses and inflation continues to reduce the purchasing power of money, customers will find that the prices in the catalog are relatively cheaper compared to more up-to-date prices in the market. This could lead to an increase in sales because shoppers are getting a better deal than what's available elsewhere.
However, there is a flipside. If wages do not adjust at the same rate as inflation, customers might experience a decrease in their real income, making them more price-sensitive and potentially reducing their discretionary spending. If wages do keep up with the rate of inflation, your sales might not be negatively affected, as portrayed in the scenario from the Land of Funny Money, where equal levels of inflation in all wages and prices maintained purchasing power parity. Yet, it is important for the business to monitor the inflation trend and update the catalog more frequently if necessary, or risk facing shrinking profit margins when acquisition costs for products increase.
Last but not least, persistent inflation might lead customers to expect further price increases and therefore accelerate their purchases, contributing to higher sales volumes in the short term. Conversely, this might also mean reduced future sales as customers would have made their purchases earlier than they might otherwise have done.