How the inflation of the cost of living has outpaced the inflation of wages
Inflation, in a general sense, refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, transport, among others. One way that inflation occurs is due to hikes in production costs, such as raw materials and wages. As resources become scarce, the cost of acquiring them is also rising. This has a direct impact on the cost of production. A surge in demand for products and services can also cause inflation. As consumers are willing to pay more for the product, manufacturers can make most of this opportunity and increase their profit margins.
As the cost of goods and services rises, the buying power of the money falls. In other words, at inflated rates, you can buy less of a commodity with a fixed amount of money. Inflation also directly impacts the cost of living. This impact worsens as we move from higher to lower-income groups. Higher food, fuel, and utility costs mean that people save less. To compensate, consumers either buy less, switch to cheaper substitutes, or look harder for bargains. This is largely down to the fact that a hike in wages also leads to a rise in inflation rates. When there is a rise in wages, manufacturers have to pay extra to acquire services. They then increase the selling prices of their commodities to accommodate this hike. At the same time, since consumers are now paid higher wages, they have more many to acquire the same goods and services. This increase in the buying power of consumers is then capitalized upon by manufacturers, thereby leading to inflated prices. This concept is known as wage push inflation.
Ideally, any rise is the cost of living should be complemented by a similar rise in wages. However, in reality, the situation is very different. Cost of living, in reality, is a highly variable metric which is influenced by several factors such as income, location, etc. Moreover, even under wage push inflation circumstances, the rise in wages varies depending upon many factors. The wage hike does not occur uniformly across all income groups in an economy. Moreover, while there might be a hike in the wages of people who directly contribute towards the manufacturing or providing a service, the wages of unrelated groups remain unaffected. They have to then spend extra money to acquire necessities by sacrificing a portion of their savings.
Harman Singh
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