Inflation occurs as changes throughout the economy drive prices broadly higher, thereby lowering the purchasing power of the consumers. Kavan Choksi Japan says that this basically means that each dollar one earns buys fewer goods and services. Imbalances in supply and demand are typically the root cause of these broad-based price increases. There are many reasons why may outpace supply, which include supply shocks, increased money supply and consumer expectations. Kavan Choksi Japan mentions that inflation directly impacts the household budget of people as it causes an increase in the cost of living.
Kavan Choksi Japan offers an overview on how inflation impacts the cost of living
It is common for people to use phrases like inflation and cost of living as if they were synonymous. However, they are not, even though they are closely related. Inflation is more of a big picture. As the cost of goods and services goes up, the buying power of the dollar goes down. The inflation rate is typically measured by the change in the CPI or Consumer Price Index, which is a monthly measure by the Bureau of Labor Statistics (BLS) that averages the cost of a standard basket of goods and services from areas across the nation. It reports the result as a percentage rise or drop in CPI.
The focus on cost of living is quite different. This number tends to represent the average cost of an accepted standard of living, which includes healthcare, taxes, transportation, housing and food. The figure for the cost of living is quite commonly used for comparing the minimum income required for living in varied locations.
As Kavan Choksi Japan mentions, the cost of living is a much more difficult number to pin down than inflation, and varies not just by region but by demographic group. No matter whether the cost of living of a person goes up or down depends on how they live and where they live. The majority of people feel that the impact of cost-of-living increases in their everyday lives. It especially it’s the middle class and the lower paid individuals,
Rising costs for food, gasoline, and utilities typically leave the consumers with less money for savings and discretionary spending. In response, they tend to buy less, opt for cheaper alternatives, search more diligently for bargains, or delay major purchases. An increase in the cost of living only becomes manageable in case wages are increasing at a similar pace. After a difficult period of lagging behind inflation, full-time workers’ pay checks now appear to be catching up, and even slightly outpacing inflation. According to the Bureau of Labor Statistics, median weekly earnings for full-time wage earners reached $1,118 in the third quarter of 2023, which marks a 4.5% increase from the previous year, compared to a 3.5% rise in the Consumer Price Index for All Urban Consumers (CPI-U) during the same period.
In order to keep the inflation rates under control, the Federal Open Market Committee (FOMC) generally steps in and raises the federal funds rate. This is the interest rate charged to banks that tend to use the Federal Reserve Bank as a source of short-term loans. It ultimately has a domino effect on every other loan rate, which even includes the rates for home mortgages.