The cost of living is a measure of how much it costs to cover everyday living expenses.
Although it is largely a function of the prices of goods and services, considering that people do not all consume the same ‘basket’ of goods and services, and even if they do, do not use them in the same quantities, changes in prices do not affect the cost of living of everybody to the same degree.
Inflation is a major cause of increases in the cost of living. Particularly in the case of cost push inflation, due to increases in the cost of the factors of production, the producers of goods and services generally pass on additional costs to the consumer. This naturally affects how much it costs to live. Additionally, the prices of goods and services increase when governments impose consumption taxes or increase those that already exist.
But people also contribute to the cost of living increasing for themselves when they waste and thus must buy more than they would have had they not wasted or misused the items they purchased. A good example of the latter is the poor use of utilities such as water and electricity. Using expensive credit to fund living expenses also increases the cost of living.
People who often resort to using credit to buy goods and services tend to make it more costly to live. Sometimes they buy items on hire purchase, for example, before they are able to manage such commitments. Other times, they use facilities like the ever-present but expensive credit card to purchase items they cannot afford. The cost of such credit facilities, interest, weighs them down and challenges their ability to live at a level in line with their financial resources.
At the same time, the poor quality of goods, especially those expected to have a long life, also contributes to higher living expenses as it costs to replace them before what would be considered to be their reasonable expected life.
One remedy for coping when the cost of living increases is higher income. As is so common, salaried employees often require their employers to increase their salaries to enable them to maintain their standard of living. Very often, the rate of salary increase tends to be below the level of price increases, but the people most at a disadvantage are those on fixed incomes, a classic case being pensioners, whose ability to buy the goods and services they normally buy is compromised.
There is a wide range of other actions that people take to cope with an increase in the cost of living. Some people take advantage of discounts, sales, and other special-price offers. Others buy in bulk even if it means combining orders with family and friends. Producing some of what one uses instead of buying all, for example, agricultural products, can also help. Caring assets better to enhance the chances of them lasting longer can also help. Reducing reliance on credit can also help as well as using cheaper alternatives if they are of good quality.
When the cost of living increases, it brings negative consequences for many. Consumers experience a decline of their standard of living. The stress brought on by the inability to buy the goods and services required affects the health of many, and this also increases their expenses. The ability of parents to finance the education of their children as well as the ability of young adults to fund their education may also suffer. Some people opt to continue to live as before but reduce their savings in order to do so, but people with very low incomes may lose some of their independence as they may turn to government programmes or family or generous people for some level of support.
Governments are generally quite aware of the need to keep a muzzle on the cost of living. For them, it is a political imperative if they hope to retain power. Thus, they tend to find ways to offer some support to the most vulnerable in the society. The Programme of Advancement Through Health and Education, known as PATH, is one such example, although it can be argued that it would still have a valid place even if prices were to remain fixed. Though not as popular as before, some governments put price-control mechanisms in place to keep a lid on prices, and subsidies are sometimes provided.
Ultimately, most people want to maintain or improve their standard of living, but how much it costs them to live is not just determined by prices, but by the choices that they make.
- Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com
