How Does Inflation Affect the Standard of Living?


The definitions of inflation and standard of living are actually subjects of some debate. Inflation is generally defined as the increase of prices denominated in a currency over time. Standard of living is normally defined as a measure of the overall fiscal health of individual citizens based on whether they can acquire their basic needs. Using those definitions, inflation can have a significant short-term effect on standard of living but a small long-term effect. The magnitude of inflation’s influence depends on the lag between wages and prices.

Inflation Defined

Inflation has two recognized definitions. An older definition that some economists still use is that inflation occurs when a country prints too much money. Under the principles of supply and demand, the more currency there is available in the market, the less it is worth. The modern and generally accepted definition states that inflation is just a general rise in price levels. This modern definition focuses on the increase of prices and less on whether monetary supply is a cause.

Defining Standard of Living

On its face, standard of living has an easy definition: the level of goods or services necessary to maintain a person in an expected set of circumstances. However, this definition is composed of many subjective elements that make it hard to know what a standard of living is in more definitive terms. Some define standard of living as a measure of per capita income and the consumption of goods and services within a country as a means to place the term in a more objective framework. While there can be many complex methods of measuring standard of living, a straightforward definition of standard of living is whether individuals can purchase what they need from the income they receive.

Prices vs. Wages

Inflation increases the prices of things, both of goods and the labor required to make those goods. If prices of goods and wages increase due to inflation at the same rate at the same time, inflation’s effect on standard of living would be minimal. However, that is not what occurs. Often, prices increase earlier and faster than wages, creating a lag. This lag means that in the short run, individuals have less purchasing power to acquire the things they need. This decrease in standard of living should be short-term, as eventually wages increase to a level comparable to the increase in good prices. However, how long that equalization takes depends on the size of the lag and the length of the inflationary period.

Standard of Living vs. Quality of Life

It is important to note that standard of living only focuses on the financial aspect of development and not on other elements. While standard of living and quality of life may be used interchangeably in some conversations, quality of life is about more than just material concerns. Quality of life also focuses on physical and emotional well-being, which standard of living does not consider.

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