Difference between Cost of Living and Inflation

The average person today has to spend more money than they did only a few years ago just to keep up with the rising cost of living. The cost of living may have gone up dramatically as a result of inflation. Though they're related, "cost of living" and "inflation" are often used interchangeably.

What is Cost of Living?

It's the cost of maintaining a certain way of life, which varies greatly from one person to the next and from one city to the next. Money spent on necessities like food, medicine, shelter, taxes, and transportation might provide some indication of a person's living level. The cost of living varies greatly from one region of the world to another. In some places, the cost of living is quite cheap, while in others, it is rather expensive. The cost of living data is very important in determining which areas are feasible.

For this evaluation, we utilize two tools -

• Since its inception in 1968, the cost of living index has been used to measure inflationary pressures on a country's standard of living by factoring in the prices of goods and services over time and accounting for the substitution of like goods and services.

• Purchasing power parity (PPP) is a technique for equating the relative prices of different regions by comparing the relative values of their currencies. This is a complicated way to calculate the cost of living.

What is Inflation?

This describes the gradual but steady rise in prices across the board for goods and services in a given economy. With prices on the rise, the value of a single unit of cash has shrunk and one can no longer purchase as much as it once could. Although inflation is commonly associated with negative outcomes for economies, there may be some positive benefits to inflation as well.

The following are the two categories of inflation −

• Price inflation – Inflation refers to an increase in the general level of prices paid for goods and services by consumers.

• Red inflation – Inflation measured in red indicates that the purchasing power parity has decreased.

Some of the adverse consequences are as follows −

• The opportunity cost that comes with keeping money grows with time.

• A reduction in the incentive to save money and make investments as a result of uncertainty over future inflation

• Insufficiencies in the supply of consumer goods and services fosters hoarding

These are some of the favorable effects −

• A decline in the rate of unemployment as a consequence of nominal wage rigidity.

• The inefficiencies that are linked with deflation are circumvented.

• Promotes the lending of money and investment as an alternative to the accumulation of wealth

The Consumer Price Index (CPI) is used to measure inflation by averaging the prices of a basket of goods and services, often those associated with living expenses but also include things like medical care, transportation, and food.

Differences: Cost of Living and Inflation

The following table highlights how Cost of Living is different from Inflation -

Conclusion

What we mean when we talk about the "cost of living" are the regular monthly outlays that people must make to maintain a given standard of living. Cost of living indices and purchasing power parity calculators are used to account for individual and regional differences in these costs.

When the price level of products and services rises across the board in an economy, it is known as inflation. The CPI may be used to monitor this rise in prices. Both have an effect on the economy, yet they are different in many respects.