In the past few years, you might have noticed the price of basic goods increasing (technically called inflation). Inflation is defined as the rate at which the general level of prices for goods and services rises, leading to lower purchasing power. In other words, consumers’ money goes less far than it used to for an identical purchase. If you have ever heard a grandparent say, “A bottle of soda used to cost 5 cents when I was your age,” that’s inflation for you.
Over long time horizons, the price of everyday consumer goods tends to go up. This is sometimes, but not always, supplemented by increased wages. Certain product categories like the average price of new cars and college tuition have outpaced average increases in income. In some states like Iowa, where I grew up and worked in high school, the minimum wage is currently $7.25 per hour, which has gone unchanged since 2008 even though the cost of living has substantially increased1. Here are three key reasons why increasing prices on necessary everyday purchases makes consumers less happy.
Higher prices for needs leave less money for wants
Consumer psychologists find consistent evidence that spending a little more money on experiences and a little less money on material items tends to boost happiness2-3. If you are stuck paying more money on rent, food, and insurance, you are simply going to have less cash available for vacations, dining at restaurants, and experiencing live shows or concerts.
Since unique and interesting experiences add tremendous richness to our lives and our happiness, people on a budget are going to take a hit in terms of their well-being if their wages do not match or exceed the price of necessary purchases. Paying rent/mortgage, car and insurance payments, and buying groceries are necessities that we must have even though they don’t necessarily give us the most bang for our buck in terms of enjoyment. We need them to avoid being unhappy, yet spending money on rent and groceries does not significantly boost happiness.
It feels unfair to pay more for the same thing
One of the reasons we hate it when prices increase is because we are forced to pay more money for an identical good that was lower in price just last year. The item has not inherently become more valuable, yet it costs more. It feels unfair, and that can diminish happiness. Shelter costs have increased 5.1% in the last year and food prices 2.2%4. Paying $200 a month more for the same apartment you have lived in for the past year or $0.50 more for the same carton of eggs you’ve been buying every week for the last year feels like a punishment.
Increased prices hurt lower-income people more
An unfortunate fact of increasing prices for necessities is that the biggest impact is felt by those at the bottom of the income ladder. If the price of daycare increases 10% next year, this is simply more difficult for parents who earn less money to cover. Increasing costs of necessities make it disproportionately more difficult for lower-income consumers to pay off debts, fund a retirement account, or save up for a down payment on a home compared to people bringing home more bacon.
Conclusion
Increased prices can be a killer for our well-being. We have less money for happiness-inducing purchases, we experience frustration paying more money for an identical item, and increased strain is felt by low-income consumers. Understanding the psychological effects of inflation is crucial for policymakers and individuals alike, as it shapes our overall well-being.
The best way to tackle the problem and build financial success is to make a budget and stick to it. Experts recommend the 50-30-20 rule, spending 50% of your pay on necessities (housing, transportation, insurance, food, bills), 30% on fun (travel, restaurants, entertainment), and 20% on wealth creation (paying down debt, saving for retirement, college fund for children)5. While inflation may be eating into the 50% of necessities, tracking expenses and making sure you have enough to build wealth and have some fun in the meantime will help you achieve your goals.
