Inflation and Consumer Spending

Read this section for an in-depth look at the relationship between inflation, the economy, and how we spend our money. As you read this material, consider the effect of inflation on your purchasing power and buying habits. As the rate of inflation increases, there is a decline in your purchasing power as a consumer, but a decrease in inflation and lower prices can also affect what we buy. For example, as gas prices decline, we see an associated decline in the rate of hybrid car purchases. List three ways that inflation might affect your life.

Consumer Income, Purchasing Power, and Confidence

The CPI and CCI are measures of the strength of the economy, and perceptions of businesses and individuals towards the economic future.


Learning Objectives

  • Distinguish between a consumer price index (CPI) and a consumer confidence index (CCI)
  • Illustrate the relationship between consumer purchasing power, pricing, and the economy


Key Points

  • Purchasing power can change if the price of goods increases/decreases, or if inflation increases/decreases. A higher real income means a higher purchasing power since real income refers to the income adjusted for inflation.
  • A CPI can be used to index the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values.
  • if the economy expands causing consumer confidence to be higher, consumers will be making more purchases. On the other hand, if the economy contracts or is in bad shape, confidence is lower, and consumers tend to save more and spend less.


Terms

  • consumer confidence

    An economic indicator measuring the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation.

  • consumer price index

    A statistical estimate of the level of prices of goods and services bought for consumption purposes by households.

  • purchasing power

    The amount of goods and services that can be bought with a unit of currency or by consumers.

Source: Boundless
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