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Understanding the Cost-of-Living Crisis: Raising Prices Is Not an Effective Strategy

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Global inflation is expected to remain high, with a forecast of 7.0% in 2023. At the same time, global average household disposable income is expected to decline by 0.2% year-on-year in real terms, meaning households worldwide continue to grapple with the cost-of-living crisis. However, the impacts of rising costs are not equal between countries and between income types, with poorer consumers (as well as consumers living in poorer countries) experiencing a more severe burden linked to the rising cost of living. This requires businesses to adopt targeted strategies that consider diverse consumer segments and go beyond simply passing on the price rises by helping to address the more fundamental issue of inequality.

No room for price hikes

The essentials of food, housing, and clothing absorb a larger share of consumer spending in emerging and developing countries than in developed countries. This makes the pressure of the rising cost of living significantly higher in emerging and developing markets, leaving little or no room for consumers to absorb price increases. To succeed in these markets, companies must prioritise affordability and value – for example, by offering cost-effective solutions and establishing a trusted partnership with consumers to fully understand and address their needs (and constraints).Cost-of-Living Crisis Chart 1.svg

Cost of Living Index reveals the varying impact of rising costs

Within individual countries, the burden of the rising cost of living on consumers is not uniform across different income deciles (from 1 to 10, with decile 1 representing the poorest 10% of households in a country), because the spending priorities of different income groups vary hugely:

  • According to Euromonitor International’s Cost of Living Index by Income, which measures price hikes for different income deciles, low-income consumers (decile 1) typically experienced the fastest living cost increases during the 2018-2023 period, regardless of whether they live in developed or developing countries.
  • This is because the essentials of food, housing, and clothing absorbed a disproportionately larger share of decile 1 household budget, making these households more vulnerable to the rising cost of living. In Brazil, for example, essential spending is set to absorb 68.3% of decile 1 household budget in 2023, far higher than the 26.5% share of household budget that decile 10 is expected to allocate to essential items in the same year.
  • Furthermore, poorer households often experience weaker income gains than richer households. In the US, during the 2017-2022 period, real growth in household disposable incomes stood at 16.0% for decile 10, compared to only 3.9% for decile 1. When taking into account poorer households’ spending patterns (in which food absorbs a larger share of their outlay) and their weaker income gains, the impact of the rising cost of living is disproportionately tougher for lower-income households.Cost-of-Living Crisis Chart 2.svg

Targeted strategies and beyond

The graver impact of the rising cost of living on low-income households can have ripple effects on the wider economy and society. As well as depressing discretionary spending by low-income households and thereby affecting overall market potential, it can exacerbate income inequality and deter the expansion of the middle class.

To navigate the cost-of-living crisis successfully, consumer-focused companies need to be mindful of the varying impacts that rising costs have on different income groups. Instead of raising prices across the board, it will be more effective for businesses to implement targeted pricing strategies that pass on cost increases through products bought by consumers who are less sensitive to price rises. In the UK, for example, supermarkets such as Tesco, Sainsbury’s, and Morrisons are implementing personalised price cuts through their loyalty schemes, giving shoppers discounts based on their needs and habits. Meanwhile, companies need to double down on affordability and value by reviewing product portfolios to offer private label options that are cost-effective yet provide more than basic value for consumers.

Beyond pricing strategies, businesses need to play an active role in supporting communities and reducing income inequality. By promoting equal opportunities and salaries, fostering fair and inclusive business practices, and establishing a trusted and accountable partnership with the consumer, companies can directly contribute to narrowing the income gap, which will help boost household incomes, foster a more prosperous middle class, and ultimately instil loyalty and trust in the brand/business. All these factors are crucial for long-term business success.

Cost of Living Index methodology

To measure the impact of price hikes for households of different income types, Euromonitor International developed a proprietary Cost of Living Index for each income decile based on their general pattern of spending. The foundation of this index is our unique data on Consumer Expenditure by Income and Category, which provides a comprehensive understanding of how households in different income groups allocate their budgets across various consumer spending categories. The calculation involves using an Index of Consumer Prices by Category, which is a weighted average of price indices for all spending categories within each income decile.

For example, to calculate the Cost of Living Index for a specific income decile in a country, the Consumer Expenditure data for that decile is used to determine the spending share for each category. These shares act as weights, which are then multiplied by the respective Index of Consumer Prices for each category. The weighted values are then summed up to derive the Cost of Living Index specific to that income decile in the country. 

The Cost of Living Index is a powerful tool to track how inflation affects different segments of consumers. While headline inflation provides a general overview of price trends and represents an average for the entire country, the Cost of Living Index measures the actual impact of rising costs depending on households’ income types and their shopping baskets. This level of granularity allows companies to gain a more nuanced understanding of the inflationary pressures faced by different income groups in order to strategise accordingly.

Check out our infographic to dive into data on the cost-of-living crisis, price increases and essential spending in major economies.

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