Inflation and Consumer Spending
- 1e Explain current economic trends and growth (CLO 1)
Consumer Income, Purchasing Power, and Confidence
buttons.Now, let's explore the relationship between inflation, the economy, and consumer spending habits. As you review the material, consider how changes in inflation can affect your purchasing power and personal decisions. For example, rising inflation often reduces how much you can buy with your money, while lower inflation and falling prices can change consumer behavior, as seen when declining gas prices lead to fewer hybrid car purchases.
Think critically and come up with three ways inflation might directly affect your life.
The CPI and CCI are measures of the strength of the economy, and perceptions of businesses and individuals towards the economic future.
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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