Economic Factors

Prices, affected by the rate of inflation, naturally impact consumer spending on goods

significantly. This is one reason the producer price index (PPI) and the consumer price index

(CPI) are considered leading economic indicators. Higher inflation rates erode purchasing power,

making it less likely that consumers have excess income to spend after covering basic expenses

such as food and housing. Higher price tags on consumer goods also deter spending.

Interest rates can also impact the level of spending on consumer goods substantially.

Many higher-end consumer goods, such as automobiles or jewelry, are often purchased by

consumers on credit. Higher interest rates make such purchases substantially more expensive and

therefore deter these expenditures. Higher interest rates generally mean tighter credit as well,

making it more difficult for consumers to obtain the necessary financing for major purchases

such as new cars. Consumers often postpone purchasing luxury items until more favorable credit

terms are available. (Maverick, 2020)

Maverick, J. (2020). Which Economic Factors Most Affect the Demand for Consumer Goods?
https://www.investopedia.com/ask/answers/042815/which-economic-factors-most-affect-
demand-consumer-goods.asp

The economic factors behind consumer behaviors are relevant especially in the durable

goods market, where products tend to command high prices. They can be divided into two main

areas: the macroeconomic and microeconomic. The economic environment beyond those two

areas does not have a significant impact on consumer choices because it is formed by legislative

and executive power, which is not directly influenced by consumers. The microeconomic

environment directly influences purchasers’ behaviors. It is just this environment that covers

incomes, expenses, savings, the ability to use loans and own durable resources (apartments and
houses, for example) that defines consumers’ material status. (Zwierzyński, 2017)

Zwierzyński, P. (2017) The determinants of consumer behaviours in the furniture market.

Available from:

https://www.researchgate.net/publication/322873416_The_determinants_of_consumer_behaviou

rs_in_the_furniture_market

The law of supply and demand demonstrates the relationship between supply, demand and

prices. As demand drives upward, so do the prices. This relationship attracts more suppliers,

serving to not only stabilize the prices but also to keep the demand at healthy consumer levels.

Supply and demand affect consumer behavior because if a product is too expensive, consumer

demand for that product will decrease.

In addition, interest rate fluctuations affect consumer spending because when rates are

high, consumers are less inclined to borrow money from the banks to purchase big-ticket

items such as a house or a car. Interest rates determine a consumer's purchasing power. For

instance, if an individual borrowed money to purchase a home with an adjustable-rate

mortgage, once that rate goes up, that individual may no longer be able to afford that house.

An increase in inflation means an increase in prices. This affects whether or not a

consumer is able to afford the higher price. Inflation directly affects the value of the dollar

because when inflation goes up, the dollar's value goes down, and so does the consumer's
purchasing power. Inflation especially affects consumer behavior when wages do not increase

to accommodate the increase in prices.

Furthermore, unemployment affects consumer behavior because if a person is without a steady

income, his purchasing power decreases considerably. According to Trading Economics, the

unemployment rate in the United States between October 2009 and December 2009 was the

highest it has been since the record high of 10.80 percent in November 1982. During this time,

home sales were also down because fewer people were able to afford a home mortgage.

(Lee,2017)

Lee, S. (2017) Economic Factors that Affect Consumer Behavior https://bizfluent.com/info-

7783439-dollar-interest-rates-go-up.html