Lifestyle Inflation

Lifestyle Inflation

Lifestyle inflation is not a new term to an economist or anybody who has taken up economics during their coursework irrespective of whether the student majored or minored in the subject. So, every time the income of an individual increases the individual spends more on consumption of normal goods rather than saving.

So, what’s a normal good you ask? To all my non-economics friends, in simple terms a normal good is any general commodity or service that comes to your mind such as clothes, food, retail stuffs, shopping mart item. A commodity for which you would be willing to purchase more if it’s price went down. For example; if there is a sale, you would be willing to buy 2 shirts instead of one because you got them cheaper in comparison to a regular deal.

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What triggers a lifestyle inflation?

Lifestyle inflation

Textbooks will point towards the snobbish attitude, the Veblen effect or the bandwagon frame of mind that triggers the need to spend more money, or shift higher in the lifestyle game. But let’s talk about it broadly!

When ever you see your colleague in a new shirt/dress or a new cell phone or a new house, somewhere down the line you feel jealous and immediate want the same for yourself. The constant attitude or sometimes the need to compare our lifestyle with that of a friend, work colleague, or a neighbor triggers to contribute to the lifestyle inflation. This is obviously more true if you are well to do i.e. earn a decent amount of money to support your needs, desires, or wants. If you desire to purchase a new iphone but your budget doesn’t allow a cell phone itself, we can safely say that you cannot contribute to any lifestyle inflation.

The class of people who desire to look boujee are the ones who fall in the trap of lifestyle inflation. ‘Who are boujee’ – you ask? The section of the society who desire or aspire to belong to an upper class or the √©lite section when in reality they aren’t. In layman terminology we call them the middle class middle. Where probably – you and I both can easily be categorized.

Let’s read the data

I have downloaded 2 sets of data from the World Bank (worldbank.org) which include

  • Final consumption expenditure per capita (constant 2015 US$) and
  • net national income per capita (constant 2015 US$)

As per the texts consumption and income should be positively related. As income rises consumption should rise too.

Marginal propensity to consume (MPC) + Marginal propensity to save (MPS) should be equal to 1. However, as income increases one tends to consume more in comparison to his savings. Does this literature hold true with real time data?

Data range: 2012 – 2020

Cross section: the cross section consists of three groups. The World Bank classification classifies 266 countries on the basis of income into low, middle, and high economies.

Let’s test the correlation between consumption and income of our dataset.

Correlation = 0.8787; which suggests the literature still stands steady.

Descriptive Statistics

In this section, a descriptive analysis is done to casually look at the pattern of consumption and income of each economy. The data was downloaded from the official website of World Bank and then the growth rates were calculated.

For the low income countries we do not find any particular pattern between their consumption and income. In some years income exceeded consumption expenditure and in some years the income generated were far fetched from the consumption expenditure.

Now, here we notice that consumption is always greater than income. These countries reflect a typical developing economy characteristic where in the MPC is always greater than MPS.

The high income economies have shown a more or less balanced pattern i.e. the growth of consumption expenditure is similar (not congruent) to the income growth rates.

Thus, the middle income economies are more likely to face the problem of lifestyle inflation. It goes without mentioning that there are other factors that contribute to inflation and this article is just casually looking at data without any in depth analysis. We might bring in an detailed study on the same but it is subject to research team availability.

Ms. Shreya Roy
Ms. Shreya Roy

Ms. Roy is the Director and Founder at Ecofunomics LLP. She is an economist by profession and currently a Ph.D. research scholar at the Indian Institute of Foreign Trade She is a lover of art and a philanthropist by heart.

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