“Cost of living” and “inflation” are two terms that are often confused, since they are sometimes used interchangeably. Despite the fact that both are somewhat similar in nature, since both measure and compare changes in price levels, they are related to different economic conditions. Inflation is a macroeconomic condition that affects all parties in an economy, while cost of living can be controlled by the mobility of resources.
The key difference between the two is that cost of living is the cost of maintaining a certain standard of living, whereas inflation is the general increase in price levels in the economy. However, both are strong economic conditions that showcase the economic status of a country or region. Generally, if there is high inflation, it is backed by high cost of living. It should be noted, however, that cost of living cannot be controlled easily by Government intervention, since cost of living is mainly driven by demand and supply of resources in a geographical area (Jacobs et.al) and (Pak, 2011).
Implications of cost of living adjustments
The importance of cost of living in determining the true value of income shows why policymakers should not be single-minded in pursuing policies that appear to achieve greater economic growth, but should also work toward a lower cost of living. It should be noted that, for example, reducing the cost of living by 10 percent has the same impact on the standard of living of the population or people as a 10 percent increase in their incomes (Schomach, 2017).
Another issue that arises from addressing cost of living is income inequality. This has become a central motivating issue in recent years, owing to the writings of various economic authors. Personal incomes unadjusted for cost of living do not reflect how well or poorly people actually live.
Cost of living and some policy implications – the case of some U.S States.
Empirical studies have shown that cost of living across some states in the United States can vary profoundly. Studies showed that cost of living were impacted by policies such as stricter zoning, higher minimum wages, occupational licensing, and other labour and business regulations, with more highly regulated states seeing higher costs of living. Consequently, higher regulated states also greatly disadvantage those with low and middle-class incomes. As such, the cost of living should become a major policy consideration with the aim of keeping cost of living as low as possible.
In order to address the issue of rising cost of living, the policy approach must be multi-dimensional, and must include measures to address urbanisation, such as housing, and connectivity, improving financial awareness, and enhancing productivity and income. Importantly, greater efforts should be directed at increasing productivity levels; inter alia, the adoption of modern technology and increasing the skills of workers through access to better education and training. This would enable the average lower-income earners and mid-income class to move up the value chain towards higher value-added jobs to achieve higher incomes, and hence afford a higher standard of living.
In the case of Guyana, however, in the context of pursuing policies to address rising cost of living, much more needs to be done by perhaps the National Bureau of Statistics, to address the lack of data compilation of cost of living indicators and to develop a cost of living index. This, in turn, can greatly aid policy makers to pursue the right mixture of policies to ensure that cost of living is kept at the lowest levels possible.