Question

What are the causes of starting consumer andolan

Answer 1

Hey mate,Interest Rates – Interest Rates influence the cost of borrowing and mortgage interest payments. – Higher interest rates increase the cost of mortgage payments. Therefore higher rates will lead to lower spending as consumers have lower disposable income. It is also important to note real interest rates – interest rates – inflation.

However, higher interest rates will also increase the income from savings, so some groups of people may feel they have more income.

Wage growth. Higher wages are the most significant factor in encouraging consumer spending.

Inflation. Inflation can be influential in determining spending. If inflation is greater than nominal wage growth, then consumers will see a fall in disposable income.



This graph shows nominal wages and inflation. Between 2008 and 2014, inflation was higher than nominal wages – causing weak consumer spending.

Deflation – periods of deflation (falling prices) can also have a negative impact on consumer spending. If prices are falling, consumers may feel that prices will be cheaper in the future and therefore, they delay purchasing goods – hoping they will be cheaper. Deflation can also cause a rise in the real value of debt, squeezing incomes.

House prices – Housing is the biggest form of wealth. When house prices are rising people are more confident to spend and they can also remortgage their houses. Rising house prices cause a wealth effect – with higher prices encouraging spending.