Impact of Inflation on Household Consumption and Saving Behaviour

Abstract

Inflation changes household welfare by reducing purchasing power when income growth does not keep pace with prices. This conceptual review examines how inflation affects the composition and timing of consumption, the capacity to save, and the real value of financial assets. It synthesizes the literature on consumption theory, inflation expectations and household balance sheets. Rising costs of necessities can crowd out discretionary spending and regular saving, especially for households with limited income and financial buffers. Some households draw down savings or borrow to maintain consumption; others increase precautionary saving when uncertainty rises and resources permit. Expectations of higher prices may bring purchases forward, but weak income prospects and borrowing costs can discourage expenditure. Effects differ with household consumption baskets, age, income security, assets and debt contracts. The review concludes that price stability, targeted support, accessible savings products and financial literacy can reduce vulnerability. The tables present conceptual comparisons rather than newly collected household observations.