How Is the Cost of Living Affected by Inflation?

Today's turbulent economy has many people feeling cautious and uncertain. Whether you plan to move to a new town, purchase one of the homes for sale in Boston, Mass., or start on an exciting new career path, not knowing how inflation and rising costs will affect your financial footing can be stressful.

A close look at the current cost of living metrics and reputable forecasts can help put your mind at ease and give you a deeper understanding of the market forces. In this guide, you'll learn more about the intertwined relationship between inflation and the cost of living in Boston-area communities, as well as other factors that can affect your finances over time.

Inflation is — broadly — the rate at which goods and services become more expensive over time, and there are several different reasons why inflation might be creeping (or stampeding) past its ideal 3% rate:

• Demand-pull inflation: Unemployment is low, people are feeling confident, and they're buying more or willing to buy at higher prices. As far as inflation goes, this is a positive dynamic.
  
  
• Increased money supply: If the government prints more money too quickly, the amount of available money outstrips the supply of goods, and prices rise accordingly.
  
  
• Cost-push inflation: Here, the cost of goods, raw materials, and services has gone up, so prices increase without anyone necessarily collecting more profits. This was a common theme during the pandemic. We continue to see this today in the real estate industry due to the increased cost of construction materials and labor.
  
  
• Government action: When the Federal Reserve increases the interest rate, this will affect inflation, and it's not always predictable how it will affect prices for people across the country.

Inflation can affect your budget in multiple different contexts, depending on your job, how you spend your money, and your assets. For example, if you work in a niche industry during a period of demand-pull inflation, you may see your income go up. It may even go up with the spending power of a dollar — a true raise instead of a nominal raise that doesn't increase your purchasing power. Alternatively, you may receive a raise that's just a cost-of-living adjustment, or you may switch to a new job with a higher income on paper that still falls below the purchasing power a few years ago.

Similarly, inflation will impact your budget differently. In July 2023, grocery prices in Boston were 4.7% higher than the same time a year before. However, you may have felt that increase more sharply if you eat more eggs than canned fish. Going further, if you were exploring the Boston luxury real estate market in 2021 or 2022, you might have encountered a median housing price of over $700,000, whereas the median price in the first quarter of 2023 was $644,400. The values are still trending upward over time but have seasonal off-peaks, even among the most alluring Boston homes. This all means that inflation will affect your personal financial journey differently.

However, costs for virtually everyone are rising due to inflation and a wide range of market factors.

Rather than comparing line items in your specific budget across past and current prices, it can be helpful (and much simpler) to use a cost of living index as a versatile tool. If you're considering moving to Boston or a surrounding suburb or leaving Massachusetts entirely, a robust cost-of-living calculator can help you compare prices in different cities and contextualize those numbers against the national average.

There are many different numbers you'll see in a COL analysis, including:

• The general COL: Usually expressed as a percentage above or below the national average
• Housing costs
• Utilities
• Food and groceries
• Transportation

For instance, in Boston, the overall cost of living is 50% higher than the national average. Transportation costs are 28% higher, utilities are 25% higher, and food and groceries are 14% above the national average. The most dramatic data point is the housing costs, however, which are 124% higher in Boston than the national average.

Of course, these numbers may not be entirely accurate depending on your unique experiences and lifestyle. However, you can use this paradigm to consider how moving will impact your budget and financial goals. Now, let's examine some of the factors leading to this higher COL.

Inflation will be one of the most predominant factors making goods, housing, and transportation costs higher. Whether the inflation is “good” or “bad” doesn't change how prices across the country are continuing to climb.

Inflation is also an indirect factor that can impact the price of real estate in Boston, as it can greatly affect the amount of money you can borrow for a home. When the Federal Reserve increases the interest rate unpredictably or inflation behaves unusually, lenders and banks are less confident. This, in turn, may result in higher interest rates for mortgage loans (which are impacted by but not tied to the Federal Reserve's rate) or less money approved. Combine this factor with the rising prices in the Boston luxury real estate market, and it's essential to be both strategic and realistic when searching for a new home.

It's not just that prices of homes are rising and many prospective buyers are feeling tightly wedged between the increased prices and their decreased buying power. Inflation itself will often make property values and market prices rise. In demand-pull inflation, people are willing to pay more for homes, and other buyers will need to offer more competitive amounts to win a property. In cost-push, increased construction and renovation costs push the prices up beyond what the market wants to accommodate. Depending on the area you're focused on, you may see either principal at work — or even both.

Reach out today for a consultation with the Louise Touchette Team for a detailed examination of the market, your budget, and how you can find the right home in the Boston real estate landscape. This top team of agents is highly trusted throughout the Greater Boston area, and they are ready to help you achieve all your goals.