Understanding the Impact of Inflation on Consumer Spending Habits

Inflation alters the spending behavior of consumers in more ways than one. While inflation may not be in everyone’s best interests, in the eyes of economics, minor and controlled inflations work in favor of growth but if it gets out of hand, the consumers suffer immensely. Today we will take a look at how consumers spending patterns are affected by inflation. To get a general idea, inflation is a direct hit to the purchasing power of consumers. If your money is growing at the same pace as inflation, the overall income stays the same holistically. Although inflation doesn’t affect everyone equally, it is seen that people on the lower end of the income spectrum get the stick.
One of the major changes we see among consumers as inflation hits are their desperate attempt to get rid of recurring expenditures. Cost cutting in middle to lower-class families occurs in three steps.

Step 1: Cutting down on luxury. In this step we find consumers switch to cheaper products for less important things, cut down on entertainment and needless expenses, and put a stop to overspending.

Step 2: Making compromises. Here we see consumers get desperate and get rid of things even if they are hard to live without. Most recurring expenditures are put to a halt and spending becomes limited to savings and essentials.

Step 3: Helplessness. We find consumers become helpless at this stage. We find them cutting down on essentials like food, and health and even going bankrupt in an attempt to keep the lights on. Here consumer behavior goes towards survival and more often than not, we overlook important things like insurance, a school for kids, medicine, and even food.

To summarize, even though inflation affects everyone, it is generally the lower and middle class that suffers the most. In the best cases, we find them cutting down on luxury to support the essentials and in the worst cases, we find consumers let go of essentials well just to survive. In addition to this, we find a drastic reduction in the purchase of depreciating assets, especially ones that come with a recurring cost, for example, a car. While there are a plethora of downsides to inflation, there are little upsides but that is for a blog of its own. In the meanwhile, we here at LiteFin have several tools in place that will help you manage your personal finance so that you remain steady under any economic situation that may arise in the future.


Lavanya Kanchanapalli

Partner at LiteFin


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