What is lifestyle inflation?

Lifestyle inflation refers to the tendency of individuals to increase their spending as their income increases. When people receive a raise or a bonus, they may feel more financially secure and consequently start to spend more on non-essential items, luxury goods, or experiences. This behavior can lead to a pattern of spending that grows proportionally to income changes, which might create challenges if income decreases or does not keep pace with ongoing expenditures.

This concept illustrates how financial stability can be negatively impacted if individuals do not manage their spending habits appropriately in line with their income. As expenses rise with income, there may be little to no additional savings, which can lead to financial instability during periods of income fluctuation or economic downturns. Understanding lifestyle inflation emphasizes the importance of maintaining a balanced approach to spending and saving, regardless of income growth.