The Impact of Inflation on Consumer Purchasing Power: A Sectoral Analysis

Abstract

Inflation erodes real income and consumption as a function of price elasticity of demand and change in real income plus change in demand and supply of relative prices․ This paper describes the interrelationship of changes in demand for necessities‚ luxuries‚ services‚ and technology as costs of the goods increase as a result of the inflationary process․ The results of the empirical analysis will show that increasing inflation reduces real income and consumer demand․ Inflation has a smaller effect on the demand for basic goods than for other‚ more discretionary goods‚ creating sectoral imbalances․ Potential policy options to retain consumer purchasing power and combat inflation are suggested․