Inflation and Living Standards: Real Income Erosion and Household Welfare Disparities

Inflation is a chronic macroeconomic problem having direct effects on the welfare of households and socioeconomic stability. Increasing prices, especially of basic goods and services, undermine the purchasing power and, more so, impact low and middle-income households disproportionately, and hence inflation is an essential concern beyond aggregate price stability. As much as the extant literature fully discusses the relationship between inflation and economic growth and monetary policy, less focus has been made on how inflation is reflected on the household level and how it is converted into perceived changes in living standards. This paper fills this gap by exploring the difference between the official inflation indexes and inflation experienced by households with the help of the key consumption items of food, energy, transport, and housing. There is a mixed-method research design, which combines macroeconomic information of inflation, consumer prices, and real income dynamics and comparative analysis of household expenditure patterns by income category. The descriptive and comparative approach is applied to official statistical data of the national statistical agencies and central bank reports to identify the patterns of distribution and welfare. The results indicate that inflation in the prices of the fundamental commodities exceeds the headline inflation and results in a greater decrease in real incomes than indicated by the aggregate measures. Consequently, consumers shift their spending toward the consumption of necessities at the expense of spending on education and healthcare, as well as savings. These impacts are most dominant in the low and middle income groups and these show that inflation is a retrogressive phenomenon in the weak indexation of income. The paper concludes by finding that monetary policy is not adequate to cushions living standards when inflationary pressures are sustained. The policy response needed to be effective and should be monetary, fiscal and social protection, timely adjustment of incomes and specific support of vulnerable households.