Why higher prices lower your happiness

In recent years you may have noticed that the price of basic goods has been rising (technically called inflation). Inflation is defined as the rate at which the general price level for goods and services increases, leading to lower purchasing power. In other words, consumers’ money doesn’t go as far as it used to for an identical purchase. If you’ve ever heard a grandparent say, “A bottle of soda cost five cents when I was your age,” that’s inflation for you.

Over a long time horizon, the price of everyday consumer goods tends to rise. This is sometimes, but not always, supplemented by higher wages. Certain product categories, such as the average price of new cars and college tuition, have outpaced average income growth. In some states, like Iowa, where I grew up and worked in high school, the minimum wage is currently $7.25 per hour, which has remained unchanged since 2008 even as the cost of living has risen significantly¹. Here are three key reasons why raising prices for essential everyday purchases makes consumers less happy.

Higher prices for needs leave less money for needs

Consumer psychologists find consistent evidence that spending a little more money on experiences and a little less money on material things tends to increase happiness^2-3. If you’re stuck paying more money on rent, food, and insurance, you’ll simply have less money available for vacations, dining at restaurants, and experiencing live shows or concerts.

Because unique and interesting experiences add enormous richness to our lives and happiness, people on a budget will take a hit in terms of their well-being if their wages do not match or exceed the price of necessary purchases. Paying rent/mortgage, car and insurance payments, and buying groceries are necessities that we have to have, even if they don’t necessarily give us the most bang for our buck in terms of enjoyment. We need them to avoid that unhappybut spending money on rent and groceries does not significantly increase happiness.

It feels unfair to pay more for the same thing

One of the reasons we hate it when prices rise is because we are forced to pay more money for an identical good that was even lower in price last year. The item has not become inherently more valuable, but it does cost more. It feels unfair, and that can reduce happiness. Shelter costs have risen 5.1% in the past year and food prices have risen 2.2%⁴. It feels like one punishment.

Higher prices affect people with lower incomes more

An unfortunate fact of rising prices for necessities is that the greatest impact is felt by those at the bottom of the income ladder. If the price of childcare rises by 10% next year, it will simply be harder for parents who earn less money to pay. The rising cost of necessities makes it disproportionately harder for lower-income consumers to pay off debt, finance a livelihood pension account, or saving for a down payment on a house, compared to people who take home more bacon.

Conclusion

Rising prices can be a killer for our well-being. We have less money for purchases that cause happiness, we experience frustration when we have to pay more money for an identical item, and low-income consumers feel greater pressure. Understanding the psychological effects of inflation is critical for both policymakers and individuals because it determines our overall well-being.

The best way to tackle the problem and build financial success is to create a budget and stick to it. Experts recommend the 50-30-20 rule, where you spend 50% of your paycheck on necessities (housing, transportation, insurance, food, bills), 30% on fun (travel, restaurants, entertainment), and 20% on wealth creation (pay). paying off debts, saving for retirement, study fund for children)⁵. While inflation may eat up 50% of life’s necessities, keeping track of expenses and making sure you have enough to build wealth and have some fun in the meantime will help you reach your goal. goals.