In recent times, consumers have had to spend a lot more money than they might have a few years ago and decided to afford a nice lifestyle.
This can be regarded as an increase in the expense of living owing to inflation and, to some extent, hyperinflation too.
While the phrases cost of living, as well as inflation, are sometimes used indiscriminately, they vary in several ways. And this article will help you comprehend the distinctions between the two.
- Cost of living measures the expenses required to maintain a certain standard of living, while inflation is the overall increase in prices of goods and services.
- The cost of living varies by geographic location, whereas inflation affects an entire economy.
- Inflation can lead to an increased cost of living, making it more expensive for people to maintain their desired lifestyle.
Cost of Living vs Inflation
The cost of living refers to the amount needed to maintain a certain standard of living, including housing, food, transportation, and healthcare. Inflation is the rate at which the overall price level of goods and services in an economy increases over time.
The cost of living is indeed the quantity of cash required to pay initial expenses such as accommodation, nutrition, taxation, and medical care in a certain location and time period.
The cost of living is frequently used to evaluate the expense of residing in one city to another. Earnings determine the cost of living.
Inflation, on the other hand, is described as a circumstance in which the retail cost of goods and services rises, causing a reduction in buying power in the middling market sector or, in other words, a decrease in the purchasing power of the nation’s currency.
|Parameters of Comparison||Cost of Living||Inflation|
|Definition||The expense of sustaining a specific quality of life is referred to as the cost of living.||Inflation is described as a circumstance in which the retail cost of goods and services rises, causing a reduction in buying power of currency.|
|Boundaries||The cost of living varies depending on where you live, whether it’s a town, state, nation, or region.||Inflation boundaries include a country or a continent. Inflation gradually affects the larger population and economy.|
|Economic Effects||Affects the mobility and availability of resources and services of a given region or area.||It affects the entire country or the world irrespective of each individual.|
|Usage||For calculating the cost of residing in a city or district, in scale to the earning average of that place.||For calculating economic growth or decline on a larger scale.|
|Unit Used||The cost of living index or purchasing power parity is used to calculate the cost of living.||The CPI or Consumer Price Index is the unit for measuring national inflation.|
What is the Cost of Living?
The expense of sustaining a specific quality of life is referred to as the cost of living. It’s one of the key markers of a country’s economic success and therefore is prone to fluctuate over a period.
The living cost index or purchasing power parity is used to calculate the cost of living.
Meals, medical needs, accommodation, taxation, and transportation are all factors used to calculate the cost of living.
The cost of living varies by geography, with some regions having low costs of living and others possessing high expenses of living. The data on living costs is most important in assessing the feasibility of locations.
Two tools are used to assess this:
- Cost of living index– Originally released in 1968, it assesses the cost of living in a nation over different periods, taking into account the cost of services and goods while accounting for replacement with other similar things.
- Buying power parity– While this is a sophisticated measure of the value of living, it is founded on the variations in the buying power of the currencies concerning the proportion of the currencies’ conversion rates in respective regions.
What is Inflation?
Inflation is a measure of the rate at which a country’s economy’s price rises. Inflation happens when goods and services are in limited supply and high demand, leading to a decline in supply.
A decline in supply can be caused by a variety of circumstances, including a catastrophic occurrence that destroys a staple crop, a housing boom that depletes construction supplies, and so on.
Consumers are willing to pay more for the things they want for any reason, pressuring manufacturers and service providers to boost their costs.
Inflation is generally viewed as a big worry, especially by those who grew up during the late 1970s and the early 1980s, when inflation was widespread.
Economic collapses happen whenever the increase in weekly prices exceeds 50% over a given period.
Rapid price rises are generally followed by a breakdown in the underlying finance industry, and a sudden surge in supplies may also accompany them.
As the cost of house loans rises, many individuals are forced out of business, slowing home sales.
Sellers prefer to lower their asking price while their houses are on the marketplace for a lengthier period of time in order to entice buyers.
Main Differences Between Cost of Living and Inflation
- The cost of living refers to the expense of sustaining a specific quality of life, whereas inflation refers to the overall increase in price levels in the economy.
- The cost of living index or buying power is used to measure living costs, whereas the Consumer Price Index (CPI) is mostly used to monitor inflation.
- The cost of living differs by geographical or demographical area, such as city, state, country, or region, whereas inflation is calculated for each country.
- The cost of living is prone to change, whereas inflation occurs objectively and without regard to individuals.
- The boundaries of cost of living are limited to region or person, whereas inflation boundaries include a country or a continent.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.