HOW DOES INFLATION AFFECT CONSUMERS

HOW DOES INFLATION AFFECT CONSUMERS? WHEN THE PRICES OF CONSUMERS GOOD IN THE MARKET INCREASE, IT IS THAT POINT IN A CONSUMER’S LIFE WHEN THEY REALIZE THAT INFLATION HAS HIT THE ECONOMY. THIS POINT MAKES THEM THINK PHILOSOPHICALLY THAT WITH THE RISE IN PRICES OF GOODS, THERE SHOULD BE AN EQUAL RISE IN THEIR SALARIES, WAGES OR INCOME, TO BALANCE OUT THE EQUATION. WELL TO THINK LIKE THIS MAY BE SATISFYING BUT THIS DOES NOT HAPPEN REAL WORLD. WHAT HAPPENS IS THAT THE PRICES OF GOODS AND SERVICES GO HIGH BUT A CONSUMER’S MONTHLY OR YEARLY INCOME REMAINS THE SAME. THIS CAUSE THE BUYING POWER OF MONEY TO REDUCE. 

THE BUYING POWER OF MONEY DECREASES AND THE PRICES OF GOODS INCREASE IN THE MARKET, WHICH IS ALLOW TO INFLATION.  WHAT IS INFLATION? NO ECONOMICS, THE RATE AT WHICH THE OVERALL LEVEL OF PRICES FOR GOODS AND SERVICES IS INCREASING RESULTING IN THE BUYING POWER OF MONEY TO DECREASE IS KNOWN AS INFLATION. INFLATION IS THE OPPOSITE OF DEFLATION WHERE THE PRICES OF GOODS DECREASE RESULTING THE IN BUYING POWER OF MONEY TO INCREASE. BOTH INFLATION AND DEFLATION ARE CLOSELY LINKED TOGETHER AND HAVE AN EFFECT ON THE CONSUMER INFLATION CAN BECOME VERY TRICKY.

THIS IS BECAUSE THE PRICES OF BASIC NECESSITIES OR THE PRICES OF GOOD YOU GENERALLY NEED INCREASE AT A VERY SLOW PACE MAKING IT UNNOTICEABLE. ON THE OTHER HAND, HYPERINFLATION IS A TERM USED WHEN PRICES OF GOODS INCREASE TO VERY HIGH LEVELS MAKING IT NOTICEABLE AND DIRECTLY AFFECTING THE CONSUMER’S COST OF LIVING. HOW TO MEASURE INFLATION? THE CONSUMER PRICE INDEX (CPI) IS COMMONLY USED TO MEASURE PRICE INFLATION. THE SURVEYS OF THE WEIGHTED AVERAGE OF RELATIVELY FIXED SET OF GOODS AND SERVICES, SUCH AS FOOD, TRANSPORTATION, AND EDUCATION MEDICAL CARE IS KNOWN AS CONSUMER PRICE INDEX. THE CALCULATION OF CPI DETERMINES THE RATE OF INFLATION. THE CPI TAKES A FIXED SET OF GOODS AND EXAMINES THE CHANGES IN PRICE FROM YEAR TO YEAR. THE INCREASE IN PRICES INDICATES THAT THERE IS PRICE INFLATION. THEN THERE IS THE EMPLOYMENT COST INDEX, WHICH IS USED TO MEASURE WAGE INFLATION. THIS SHOWS HOW THE FLUCTUATION IN THE COST OF LABOR OVER A PERIOD OF TIME.

THE DIFFERENCE BETWEEN INFLATION AND COST OF LIVING AS DISCUSSED EARLIER, WE NOW KNOW WHAT INFLATION IS AND HOW IT IS MEASURED COST OF LIVING AND INFLATION ARE TOTALLY DIFFERENT FROM ONE ANOTHER BUT PEOPLE THINK OF BOTH AS SYNONYMOUS TO EACH OTHER. COST OF LIVING IS SOMETHING TO WORRY ABOUT MORE. THE MONEY NEEDED TO ACHIEVE A STANDARD OF LIVING BY FULFILLING BASIC EXPENSES SUCH AS FOOD, HOUSING, HEALTH CARE AND TAXES IS KNOWN AS THE COST OF LIVING. COST OF LIVING HELPS DIFFERENTIATE BETWEEN THE EXPENSES OF BASIC NEEDS IN ONE CITY TO THE OTHER. CAUSES OF INFLATION WHEN THERE IS A FAST RISE IN WAGES, THE COST OF PRODUCTION INCREASE PRODUCTION CAUSES THE PRICES OF FINISHED GOODS TO RISE. THE BEST EXAMPLE IS THE RISE IN PRICES OF OIL.

RISE IN THE PRICES OF OIL DIRECTLY AFFECTS THE ECONOMY. MAJORITY OF PRODUCTION PROCESS USE OIL AS A PRIMARY RAW MATERIAL, HENCE, WHEN THE OIL PRICES ARE INCREASED, COST OF PRODUCTION RISES RESULTING IN THE INCREASE OF PRICES OF GOODS. THIS CAUSES THE GENERAL RISE IN PRICES OF GOOD IN THE MARKET AND IS KNOWN AS COST-PUSH INFLATION. THEN THERE IS DEMAND-PULL INFLATION.