Inflation vs. Cost Of Living What You Should Know?

As the world economy keeps changing, so does the scope of what is considered one of the major problems for people, firms, and even governments on an individual level on the cost of living. These two concepts are always dealt with together, but it is explicitly important to understand how they are related if one is going to make sense of the challenges in today’s economic life.

What is Inflation?

Inflation is defined as the annual rate of increase in the general level of prices for goods and services. Therefore, the a reduction in a currency’s purchasing power. It is usually measured using indices like the Consumer Price Index (CPI) by corporatefinanceinstitute.com. Which measures changes in prices for a standard basket of goods over time. Causes of inflation can be different and here are some of those common triggers for it:

Demand-pull Inflation: It is the type of inflation that occurs when demand for goods and services exceeds aggregate supply hence, leading to rising prices.

Imposed from cost: If the cost of products’ input rises, which may be either labor cost or materials, then the imposed must-follow raises the retail prices to consumers.

Built-in inflation: It relates to anticipated inflation, usually originating from pay raises or price increases.

Inflation is closely watched by governments and their central banks since high levels of inflation eat into people’s savings. Reduce confidence among consumers, and can seriously disrupt an economy’s functioning. Yet moderate inflation is considered “normal” for a growing economy.

What Is The Cost Of Living?

The cost of living is all the basic expenses required to live in a house, eat food, travel, get health care, and education. It is an essential measure that is used to compare how affordable life is in different places either in countries or the whole world. As inflation increases, the cost of living also tends to increase, especially in those essentials like rent and groceries. But the relationship between inflation and the cost of living is not so direct as inflation makes prices rise, but changes in the cost of living do vary for different factors:

Wage Growth: If wages do not grow at parity with inflation, it becomes more painful to make ends meet under an increasing cost of living for individuals and families.

Geographic Location: Some places are more prone to inflation and a rise in the cost of living, based on factors related to urbanization, levels of demand for housing, or local economic policies.

Government Policies: taxation, subsidy, and social welfare programs do have an impact on the real cost of living for citizens, more especially during inflation.

The Relationship Between Inflation & The Cost Of Living

In simpler terms, inflation is the cause, and the cost of living is the effect. However, their interrelationship is more than a simple cause-and-effect type of relationship. The real challenge comes when inflation continues and is higher than the increase in income. This creates a situation where a person may have to shell out equal if not more money even if his salary has remained nearly constant.

An interesting dynamic stagflation, with inflation at high rates and no economic growth. Rising unemployment is infamously referred to by economists as a situation of the worst. Under such circumstances, inflation may be forcing prices up. But people would be in less of a position to pay these higher costs since their wage-earning potential would be shaved by stagnating job wages or job insecurity.

New Insights Into The Inflation & Cost Of Living Debate

While these have been recurring topics of conversation in terms of inflation and the cost of living, several fresh points of view still aren’t popularly known:

The Role Of Global Supply Chains:

Over the past year, we have learned a lot from global supply chains, especially by examining how they can become so open to disruption as a result of sometimes seemingly minor incidents. This is mainly what happened with the inflation attributable to the disruptions occasioned by the COVID-19 pandemic in particular sectors. 

Russia-Ukraine Conflict:

It has ensured that major commodities such as oil, gas, and wheat are continually disrupted in supply. These factors naturally get passed right down to the consumers in terms of costs. This is more than a domestic issue, it has become a glaring challenge for the world powers to manage efficient and resilient global supply chains.

Technological Disruption:

Another oncoming factor is that of technological disruption caused by automation and AI, wherein costs would be managed by a company. But jobs might be also displaced. Such automation might push up wages in certain sectors but drive down labor costs for businesses. Leaving something of a wash for the cost of living.

Technology and automation are likely to exert upward pressure on wages in some sectors. They are also more likely to exert downward pressure on businesses’ total labor costs. This could again spread costs in terms of different sectors and services that people require.

The Impact Of Real Estate On The Cost of Living:

Arguably, one of the major contributors to the contemporary cost of living is the state of the housing market. Indeed, many parts of the world have been experiencing a boom in real estate. Thereby increasing rents and home prices. More people have been attracted to suburban and rural areas because they can work remotely. Increasing the demand for housing in those areas. All this will mostly affect people of a younger age. Or lower income who may find that they are being priced out of certain areas.

Consumer Behavior & Inflation:

One of the basic premises of traditional economic theory is that people will spend less in the face of inflation. However, behavioral research on people during periods of inflation would portray them as not being as predictable as expected. For instance, some studies reveal that consumers may even increase. Spending during periods of high inflation so they can beat the imminent rise in prices further. This might result in short-term inflationary surges, further destabilizing the cost of living.

What Can You Do To Cope With Rising Costs?

It’s hard to predict what inflation and the cost of living will do. So you ought to be smart about protecting your money. Here’s how:

Income Diversification: Start finding other ways to make money working side gigs, and investments. And freelance (if possible) so you can try to keep up with rising living costs.

Invest In Long-term Assets: Real estate and stocks can often be the greatest hedges against inflation by appreciating over time.

Cut Non-essential Spending: Take a look at your monthly expenses. Try to find ways that you can cut back a little. Maybe this means cooking at home more, canceling some subscriptions that you don’t use, or taking public transportation.

Emphasis on Skill Development: Increased levels of skill result in the provision of better-paying skill-oriented job opportunities. Investment in education and certification hedges against stagnant wages during inflation.

Conclusion

The dynamics between Inflation vs. Cost of Living are more nuanced than they may initially appear. The cost of living effect is determined by various factors. Like global supply chains, existing technology, and the policies of a particular government at any given time. Knowledge of these interconnections is supposed to help individuals in making choices and businesses. Governments make informed decisions in taming the monsters of rising costs of living.

Knowledge of the constantly changing economic circumstances. And the ability to adjust to them instantly defines the financial stability of any business or person. At whatever investment or technological innovation, the current economic environment demands a forward approach.

We here at Vortexpedia aim to give our readers real insightful & valuable information. About economics, finance, and much more updated with all that’s going on in this ever-changing world. Stay tuned, stay ready, and thrive!