What is Inflation?

• Inflation is a sustained rise in the general price level of goods and services in an economy.

• It reduces the value of money, meaning consumers can buy fewer goods and services with the same amount of money.

How Inflation Affects Households

1. Purchasing Power Falls

• As prices rise, households need more income to maintain the same standard of living.

• If wages do not increase with inflation, real income falls.

• Households can afford fewer goods and services.

2. Lower Standard of Living

• Families may cut back on non-essential spending such as entertainment or leisure.

• Quality of life is reduced, especially for middle- and low-income households.

3. Impact on Fixed Income Groups

• People with fixed incomes (e.g. pensioners, retired workers) are more affected.

• Their income stays the same while prices go up, reducing what they can afford.

4. Effect on Savings

• Inflation reduces the real value of money saved over time.

• People may be discouraged from saving and may prefer to spend now rather than later.

• Savings lose their purchasing power unless interest rates are high enough to match inflation.

5. Increased Borrowing

• Some households may take loans or use credit to cope with rising prices.

• If inflation causes interest rates to rise, borrowing becomes more expensive.

• This can lead to increased debt levels.

6. Uncertainty and Budgeting Problems

• Inflation creates uncertainty in household financial planning.

• Difficult for families to plan their monthly or yearly expenses.

• Unexpected price rises can cause financial stress.

7. Low-Income Households are Hit Hardest

• They spend a higher proportion of income on basic needs like food, rent, and transport.

• Even small increases in prices affect their ability to afford essentials.

• They have less financial flexibility to absorb cost increases.

Summary

• Inflation affects all households but impacts vary depending on income level, employment, and access to financial resources.

• Households with rising incomes or assets may manage inflation better.

• Fixed and low-income households are the most vulnerable to inflation.