Question

What's the connection between cost of living and inflation? Which categories of spending are more important to individual consumers?

Do you think inflation affect people among different income scale differently? i.e. do poor people suffer more from inflation, or rich people?

For you spending every month, which categories do you spend the most of the money? Which items in your monthly spending have you seen inflation?

Answer 1

Inflation is a broad term which tells us about the level of prices in the market for a different set of consumer goods and services, inflations are measured based on different criteria but they are generally referred on the basis of change in the price of the consumer basket, and definitely, if there will be a change in the price of goods and services consumer will start to demand less which may affect their daily routine life because here we are assuming that our income remains the same while there is an increase in inflation rate which will ultimately lead to a decrease in the overall demand of the goods and services from the consumer, thus we can say inflation has a direct impact on cost of living, and the relationship between them is directly proportional, as we can see a little rise in the inflation rate would lead to a decrease in the demand due to increase in the overall cost of living. however, spending can be categorized into different segment but definitely, we can say most of the income that we earn is being spent on non-durable goods manlily related to goods and services like food, housing, and many such services and only a fraction of the income is spent on durable goods, thus for an individual consumer spending on non-durable takes away most of their income.

definitely inflation affects people differently based on their income level but if we will look carefully we will find that poor spend all their marginal increase in income on food whereas in case of rich it is very nominal or near to zero, thus we can say inflation mainly affect the real income of poor and it doesn't have much impact on rich people because they already have fulfilled their basic needs and thus even if there is a marginal increase in income there is no need to spend it on goods and service for them, whereas in case of poor people they always try to fulfill their basic needs whenever they get their marginal increase in income, Thus, the nominal income can vary for the two segments of the population groups in a different manner.

dp = 1 + FPI ........................(1)

dR = 1 .............................(2)

where

dp = dR  = food price deflator

FPI = food price inflations

thus by looking at the above equations and discussion that we have done in the above paragraph, we can say poor have to suffer more than rich people because of inflation. for an individual increase in the price of goods and services affect them the most and for me, I spend most of the income on grocery and housing services and by looking at my past expenses we can say most of my spending goes on non-durable goods.