Furthermore, we estimate that lower-income households spend a larger portion of their budget on inflation-affected products and services. Households with lower incomes will have to spend around 7% more, while those with better incomes would have to spend about 6% more.
What is inflation, and how does it influence a family’s finances?
Important Points to Remember Inflation is defined as a rise in the cost of goods and services. Alternatively, the dollar’s purchasing power is eroding. The shift in the cost of fundamental requirements of life, such as food, shelter, and healthcare, is measured by cost-of-living.
What impact does inflation have on people’s lives?
Inflation raises your cost of living over time. Inflation can be harmful to the economy if it is high enough. Price increases could be a sign of a fast-growing economy. Demand for products and services is fueled by people buying more than they need to avoid tomorrow’s rising prices.
What is the impact of inflation on families?
Inflation has had an impact on families all around the country. Housing expenses are rising, as are grocery bills and petrol prices, requiring individuals to adjust their routines, stretch their budgets, or go without. It’s been particularly difficult for parents.
Tamika Calhoun is a Jackson, Mississippi-based housing counselor. She is also a mother of five children, and she is joining us from Jackson right now.
SIMON: And please accept my apologies in advance for the fact that these are really personal queries about the family finances. What are the current grocery prices? – Is there anything you’ve gone without?
CALHOUN: On my most recent trip to the grocery store, I had to prioritize what we needed over what the kids wanted. When the kids come out of school, they’ll want snacks and other items.
CALHOUN: So we’re down to attempting to stretch the snacks or purchasing a large bag of chips rather than individual bags since they’re so expensive now. Because I have such a large family, I spend close to a hundred dollars on a single supper. And…
CALHOUN:…It didn’t seem like I was spending that much money on a single dinner before, but now – especially the meat bits – it does. We have a large family, therefore we have to get the larger meat packs.
CALHOUN: It certainly does. We don’t go anywhere any longer because petrol is scarce due to its current high price.
SIMON: Are you scared that if you don’t go to work because you’re sick or fatigued, your family will suffer even more?
CALHOUN: Definitely – either I work or we won’t have a place to live – because we don’t live someplace where we get a subsidy, like we did previously, when I knew that if I lost my job, we’d be safe in low-income housing. The rent would be reduced to a more affordable level. However, we no longer reside there. I feel like I’ve finally arrived to a point where we can move on and support ourselves without the help of the government. And now, with everything going on, I’m wondering if I chose the worst moment to do this. This was not something I expected to happen. And I realized I was mentally preparing for it. However, my savings have been reduced as a result of having to leave work due to COVID.
CALHOUN: No, since I earn far too much money, despite the fact that it is insufficient to cover all of my expenses. However, they’re…
CALHOUN:…The government’s criteria haven’t changed. Even though the price is lower, you still can’t make more than this…
SIMON: You barely make enough money to support yourself and your family. However, you earn too much money to be eligible for government aid.
CALHOUN: That’s right. We would most likely be struggling more more than we are now if it weren’t for the pandemic EBT. We’ve been stretching that a bit.
SIMON: This is a government program that provides food aid to families that would otherwise be delivered through schools.
CALHOUN: They gave, I believe, two deposits, and each youngster received their own card. So that’s what’s been really helping us out with our grocery shopping.
CALHOUN: I make an effort to be optimistic. But, if I’m being honest, I’m hoping I don’t get COVID again, or that none of my children have COVID again. It’s terrifying to think that I’ll have to send them to school and then they’ll get sick. Then there’s the fact that I don’t have child care, so I’d have to miss work to be with them. It’s possible that I’ll have to quarantine with them. And if that happens, I won’t be able to use any of my PTO time.
SIMON: Tamika, you have five children and would go to great lengths for them. However, in order to assist them, you must remain healthy and well-nourished. Do you ever get hungry?
CALHOUN: There have been instances when I’ve made sacrifices in order for them to eat. And I try not to tell them I did it…
CALHOUN:…because I know they’ll try to hand up their meals to me. But they’ve never gone hungry simply because I find a way to feed them.
SIMON: You’re right. You make self-sacrifices for your children. All I can say is that I wish you the best of luck in the world.
CALHOUN: I appreciate that. I’m optimistic because I believe things will improve. As an example, even though the world isn’t turning around, I’m working on attempting to – since, as I previously stated, wages remain constant while prices rise. If that means finding a higher-paying work or getting a degree in something that will allow me to acquire a higher-paying job, I’ll just do what I can and hope for the best.
What happens if inflation rises too quickly?
If inflation continues to rise over an extended period of time, economists refer to this as hyperinflation. Expectations that prices will continue to rise fuel inflation, which lowers the real worth of each dollar in your wallet.
Spiraling prices can lead to a currency’s value collapsing in the most extreme instances imagine Zimbabwe in the late 2000s. People will want to spend any money they have as soon as possible, fearing that prices may rise, even if only temporarily.
Although the United States is far from this situation, central banks such as the Federal Reserve want to prevent it at all costs, so they normally intervene to attempt to curb inflation before it spirals out of control.
The issue is that the primary means of doing so is by rising interest rates, which slows the economy. If the Fed is compelled to raise interest rates too quickly, it might trigger a recession and increase unemployment, as happened in the United States in the early 1980s, when inflation was at its peak. Then-Fed head Paul Volcker was successful in bringing inflation down from a high of over 14% in 1980, but at the expense of double-digit unemployment rates.
Americans aren’t experiencing inflation anywhere near that level yet, but Jerome Powell, the Fed’s current chairman, is almost likely thinking about how to keep the country from getting there.
The Conversation has given permission to reprint this article under a Creative Commons license. Read the full article here.
Photo credit for the banner image:
Prices for used cars and trucks are up 31% year over year. David Zalubowski/AP Photo
What effect does inflation have on disposable income?
Inflation has an impact on your standard of living since it lowers your purchasing power. Because many retirees live on a fixed income, inflation has a significant impact on them. Prices grow while their pension income remains unchanged. As a result, their disposable income is diminished as day-to-day expenses eat up an increasing amount of their earnings.
If wages remain stagnant or if inflation outpaces wage increases, wage earners face the same challenge. If your income rises faster than the rate of inflation, you will avoid the effects of inflation.
Why does inflation impact impoverished people?
This shift in spending away from luxury things such as vacations and new automobiles and toward needs drives inflation higher for poorer households than for wealthier people. This is due to the fact that lower-income households spend a larger portion of their income on needs.
What are the benefits and drawbacks of inflation?
Do you need help comprehending inflation and its good and negative repercussions if you’re studying HSC Economics? Continue reading to learn more!
Inflation is described as a long-term increase in the general level of prices in the economy. It has a disproportionately unfavorable impact on economic decision-making and lowers purchasing power. It does, however, have one positive effect: it prevents deflation.
Advantages of Inflation
- Deflation has the potential to be exceedingly harmful to the economy, as it might result in fewer consumer spending and growth. When prices are falling, for example, buyers are urged to put off purchasing in the hopes of a lower price in the future.
- The real worth of debt is reduced when inflation is moderate. In a deflationary environment, the real value of debt rises, putting a strain on discretionary incomes.
- Inflation rates that are moderate allow prices to adjust and goods to reach their true value.
- Wage inflation at a moderate rate allows relative salaries to adjust. Wages are stuck in a downward spiral. Firms can effectively freeze pay raises for less productive workers with moderate inflation, effectively giving them a real pay cut.
- Inflation rates that are moderate are indicative of a thriving economy. Inflation is frequently associated with economic growth.
Disadvantages of Inflation
- Inflationary rates create uncertainty and confusion, which leads to less investment. It is said that countries with continuously high inflation have poorer investment and economic growth rates.
- Increased inflation reduces international competitiveness, resulting in less exports and a worsening current account balance of payments. This is considerably more troublesome with a fixed exchange rate, such as the Euro, because countries do not have the option of devaluation.
- Inflation can lower the real worth of investments, which can be especially detrimental to elderly persons who rely on their assets. It is, however, dependent on whether interest rates are higher than inflation.
- The real value of government bonds will be reduced by inflation. To compensate, investors will demand higher bond rates, raising the cost of debt interest payments.
- Hyperinflation has the potential to ruin an economy. If inflation becomes out of control, it can lead to a vicious cycle in which rising inflation leads to higher inflation expectations, which leads to further higher prices. Hyperinflation can wipe out middle-class savings and transfer wealth and income to people with debt, assets, and real estate.
- Reduced inflation costs. Governments/Central Banks must implement a deflationary fiscal/monetary policy to restore price stability. This, however, results in weaker aggregate demand and, in many cases, a recession. Reduced inflation comes at a cost: unemployment, at least in the short term.
When weighing the benefits and drawbacks of inflation, it’s vital to assess the sort of inflation at hand.
- It’s possible that cost-push inflation is simply a blip on the radar (e.g. due to raising taxes). As a result, this is a one-time issue that isn’t as significant as deep-seated inflation (e.g. due to wage inflation and high inflation expectations)
- Cost-push inflation, on the other hand, tends to lower living standards (short-run aggregate supply is shifted left). Cost-push inflation is also difficult to manage because a central bank cannot simultaneously cut inflation and boost economic growth.
- It also depends on whether or not inflation is expected. Many people, particularly savers, are more likely to lose out if inflation is significantly greater than expected.
What effect does inflation have on groceries?
Inflation continues to wreak havoc on grocery retailers in the United States. Grocery prices rose 7.4% in January compared to the same month the previous year, the fastest increase since 2008.
However, not all foods have been affected equally by inflation. Potatoes, cheese, tea, tomatoes, spaghetti, bread, ice cream, and fresh, processed, and frozen veggies are among the pantry staples that have remained stable.