Cost of Living vs Inflation

Regardless of what your financial status may be, it seems fair to say that Jamaicans across the social spectrum are entering the new year experiencing elevated cost-of-living indexes. This is particularly frustrating and may be difficult for many to comprehend. Why has the cost of goods and services been rising wantonly over the past few weeks and months?

Case in point: Have you recently been to a fast food outlet and bought a 591 ml bottle of soda and two patties and, at the cashier, wondered when it was, exactly, that this Jamaican staple, once the cheapest lunch available, had become the price of what used to be the cost of an entire boxed lunch?

How to explain this? Inflation or cost of living?

The truth is, both answers are right.

What's the difference?

Inflation and cost of living are two separate terms, although people tend to use them interchangeably. They however are not synonymous, as, technically, one merely influences the other.

In economics, inflation (in addition to exchange rates) is what drives up cost of living. Inflation refers to a progressive increase in the cost of goods and services in a country. When this happens, it affects the value of each unit of currency, increasing general price levels, and therefore reducing the purchasing power of money, and consequently increasing the cost of living.

So, over time, inflation affects the average price level of a basket of selected goods and services in the economy. Let's demonstrate the difference in practical terms, at the most basic level. Have you seen politicians make dramatic presentations in their budget debates with baskets of basic consumer products? It's really not for dramatic flair; the basket of goods is a real economic construct used to represent the broader economy and subsequently track inflation. So, if that same basket of basic consumer goods increases by, let's say 1.5 per cent, in-between budget debates, in other words, a 12-month period, then inflation could be said to be at 1.5 per cent. The cost of living would then refer to how many items in that basket your household can actually afford to buy from one year to the next.

The pandemic and inflation

The pandemic, doubtless, has had an effect on global inflation, Jamaica being no exception. In 2019, just before the onset of the pandemic, the inflation rate was 3.91 per cent. In 2020, the year COVID reached our shores, it blossomed to 5.23 per cent, per data from Statin. In addition to high currency volatility of the Jamaican dollar over the past couple of years and international supply chain disruptions surfacing near the end of last year as a result of the pandemic, this had a huge impact on price increases, resulting in cost-of-living changes that seem to be negatively influencing your ability to save and put you back on the path of saving, thus stymieing opportunities for wealth creation.

Managing the cost of living

Fact: Inflation will have a cascading effect not just on food, but just about all goods and services. It's all well and good to measure price changes of basic food items over time, but the fact is we as human beings are complex and need more than just food. We need commodities and services to live comfortable lives. We need petrol, electricity, transportation, health care, housing, entertainment, and so on. These will all be affected by inflation, which, as stated before, lowers the purchasing power of your money.

So, for example, what did it cost to fill up your tank with petrol at the beginning of last year? What does it take now? We could ask the same of your light bill, but that might warrant a trigger warning. Still, it's so facile to blame the providers of these goods and services as being unconscionable and downright cruel. But the stark reality is that as the currency loses value, prices will increase, resulting in increases in merchants' bills, and the increased charges will have to be passed down to you, the consumer. This means your money will be able to buy fewer goods and services.

It is therefore important to come up with financial strategies to protect your way of life this year, and, despite inflation and the resultant increase in cost of living, make your money grow for you.

Lamar Harris vicepresident, wealth management, NCB Capital Markets

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