Consumer Purchasing Power

views updated


CONSUMER PURCHASING POWER. Consumer purchasing power measures the value in money for which consumers may purchase goods or services. Tied to the Consumer Price Index, or the Cost of Living Index as it is also known in the United States, consumer purchasing power indicates the degree to which inflation affects consumers' ability to buy. As a general rule, if income rises at the same rate as inflation, consumers can maintain their present standard of living. If, however, income rises faster than the rate of inflation, the standard of living will improve. By the same token, if inflation rises faster than income, even if wages and salaries also increase, then the standard of living will decline as consumers, although receiving more money in their paychecks, find their income inadequate to counteract rising prices.

Consumer purchasing power is determined by the Consumer Price Index, which surveys changes in the prices of goods and services over a period of months or years. First published in 1921 and prepared monthly from data compiled by the Bureau of the Census for the Bureau of Labor Statistics, the Consumer Price Index indicates a rise or fall in the price of four hundred select items ranging from groceries to housing. Even small changes in the price of the commodities listed on the Consumer Price Index provide the best estimate of consumer purchasing power.

Between 1922 and 1928, just after the federal government began to publish monthly reports on the cost of living and consumer purchasing power, per capita income in the United States climbed approximately 30 percent and real wages rose by an average of 22 percent. Consumer purchasing power had rarely been stronger as America became the first country in the history of the world to experience mass affluence. Yet mounting consumer debt severely restricted consumer purchasing power, a development that contributed to the onset of the Great Depression in the 1930s. The massive unemployment that accompanied the depression naturally limited consumer purchasing power even further.

To control inflation and bolster consumer purchasing power during World War II, President Franklin D. Roosevelt instituted the Office of Price Administration to fix prices on thousands on nonagricultural goods. This mechanism worked effectively in wartime, but when price controls lapsed in June of 1946, Americans experienced the worst inflation in their history, and with it a marked decline in consumer purchasing power. The price of agricultural commodities, for example, rose 14 percent in one month and 30 percent before the end of the year, which sent food prices soaring.

Despite the economic problems that beset the immediate postwar years, the increased productivity of agriculture and industry brought unprecedented affluence to the vast majority of Americans. Expendable income rose from $57 in 1950 to $80 in 1959, while consumer debt had increased 800 percent by 1957, enabling Americans to purchase everything from household appliances and television sets to sporting equipment and swimming pools—all unimaginable luxuries only a generation earlier. Strong consumer purchasing power, combined with stable prices and a minuscule inflation rate, made goods and services relatively less expensive. There had never been a better time to be a consumer.

This period of affluence ended in the early 1970s, when rising inflation, skyrocketing energy costs, and growing unemployment wreaked havoc on the American economy. Presidents Richard Nixon, Gerald Ford, and Jimmy Carter each imposed limits on wage and price increases, but to no avail. The economy continued to falter, and consumer purchasing power diminished. To rejuvenate the economy, Ronald Reagan, who became President in 1981, proposed to reduce taxes, balance the federal budget, curtail government spending on social programs, and withdraw regulations on business. Together these measures constituted what Reagan's economic advisors called "supply-side" economics. The initial results of the so-called Reagan Revolution were unsettling: stock prices tumbled, unemployment climbed to 10.8 percent, and the federal deficit reached $195 billion. It was only in 1982, when Reagan abandoned "supply-side" dogma and persuaded the Federal Reserve to expand the money supply and lower interest rates in an effort to improve consumer purchasing power, that the economy began to show signs of recovery.

By July 1990 the economic boom of the 1980s had run its course and the economy again gradually sank into recession. Given the sluggish performance of the economy during the late 1980s and early 1990s, few could have predicted the remarkable developments of the later 1990s. The emergence of the Internet and the evolution of the global economy generated unprecedented economic prosperity in the United States that lifted consumer purchasing power to new heights. Stock values escalated while inflation receded and unemployment fell. As a result, consumer confidence rose and consumer spending accelerated. At the end of 2000, however, economic growth had slowed, though sustained consumer spending prevented the downturn from worsening.


Bruchey, Stuart. The Wealth of a Nation: An Economic History of the United States. New York: Harper and Row, 1988.

Chandler, Lester V. Inflation in the United States, 1940–1948. New York: Harper, 1951.

Galbraith, John Kenneth. The Affluent Society. Boston: Houghton Mifflin, 1958.

Leuchtenburg, William E. The Perils of Prosperity, 1914–1932. Chicago: University of Chicago Press, 1993.

Port, Otis. "Customers Move into the Driver's Seat." Business Week, 4 October 1999, 103–106.

Mark G.Malvasi

See alsoConsumer Protection ; Consumerism ; Consumers Leagues ; Installment Buying, Selling, and Financing .