The Cost of Living Standard And Your Financial Security

Written by: Lori Gracing

Maintaining a consistent living standard is important for people who want to have a stable life. A person’s living standard will reveal how well they are existing in relation to their income. Out of all the economic factors influencing a person’s financial health, this is a key factor. This economic attribute is often ignored but is relevant to a person’s financial security. Keep reading to find out why the cost of living matters to all people within society.

What is the cost of living standard?

Before we discuss the importance of the cost of living standard, we need to determine what it is. In short, the cost of living standard measures how much money a person needs to cover their basic living expenses. This equation measures a person’s housing, food, healthcare, tax and other expenses compared to the amount of money they are making.

The cost of living standard is measured at the national level and it is also measured locally. Keep in mind that some parts of the United States will have a higher living cost than other parts. Some regions within states or communities within cities will have a higher living standard than their counterparts. There are many different factors that impact the cost of living standard. We’ll closer look at them in detail in the following information.

The Cost of Living Index and its Importance to Citizens

The cost of living index is designed to compare the expenses that an average person will incur for food, shelter, transportation, utilities, insurance, clothing, healthcare, entertainment, repairs and education. The cost of living standard is not an official government standard for explaining normal living expenses. This equation uses a given sum of money and how many products or services it can purchase within various areas. For example, an economic organization might use $1000 to figure out how much money a person can purchase in City A as compared to City B or City C.

Price Setting in Relation to the Cost of Living

Economics 101 states that prices are set in the market by producers and consumers. In short, products and services that are valued and/or in demand will cost more. Products or services that are rare but need special skills to produce, will cost more. Products or services that are not in demand (but common) will cost less. Products or services that are outdated will also cost less. Producers must charge their prices in relation to the amount of money that consumers are willing to pay. They simply cannot overcharge for their products or services. If they do, another producer will sell these items at a cheaper cost.

Consumers cannot be too demanding about lower prices because producers will simply find a market of people who are willing to pay for their services or products. This in turn will force consumers to pay the expected price for a product or service or do without it. Price setting principles impact the cost of living standard for people. This factor also influences the cost of living standard for people as well. Remember, prices can also be influenced by region, property value and what people are willing to pay for in order to maintain a particular lifestyle.

The Role of Inflation and how it Alters the Cost of Living

Inflation is an economic force that is designed to reduce a person’s spending power. It is a negative but natural economic factor that is automatically built into the economic process. Inflation is designed to cut a person’s purchasing power. As inflation rises it will reduce a person’s standard of living. The consumer price index is designed to measure inflation. This index is a government figure that measure the cost of goods. As inflation rises, a person’s paycheck must also rise otherwise they will not be able to keep up with price increases.

Inflation is influenced by two primary factors which include demand-pull and cost-push. Demand-pull factors that lead to inflation is caused by consumer demand that pulls prices up. Suppliers and manufacturers always have to keep up with the demand of the public. This is not an easy thing to do. Suppliers are constantly running into the problems of selling out of goods or services. So, to slow this problem down, they raise the prices higher.

Citizens that end making more money by securing more jobs or generating more income will increase inflation. Businesses can sense when people are getting more money and they will charge higher prices for their goods. This in turn helps to keep most of the money out of consumers hands. This economic approach balances out society and it strongly impacts the cost of living. Thankfully, there are financial institutions and plans in places that keep inflation from getting too far out of hand.

Cost-push happens when supply costs (from manufacturers) forces prices to rise. These costs include things the prices for raw material, labor and hiring qualified staff for operations. Each of these factors (and many more) will also influence inflation. Once again, there are financial institutions in place that stops this aspect of inflation from getting out of control as well.

How these Factors Work Together to Impact your Cost of Living

The bottom line is this: the cost of living is going to steadily increase every year. You are going to lose more purchasing power when it does. You will have to figure out a way to increase your income or you are going to be borrowing more money to deal with the rising prices. The only other alternatives are stop or slow down your spending or to live at a lower living standard.

By the way, if you happen to be rich or well off, you will be able to maintain your living standard in relation to where you live. If you are poor or barely making ends meet (like most Americans) you are going to have to figure out different ways to supplement your income just to maintain your current living standard.


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