Avoiding “The Veblen Effect”

It is not a secret that the prices of goods and services have increased substantially over the past year. We see it in our daily lives, whether at the grocery store or browsing Amazon.com in search of our familiar vices. As some of you know, this steady increase in the prices of goods and services is due to inflation (in most cases). According to the United States Bureau of Labor Statistics, year-over-year inflation currently sits at 4.93% for the 12 months ending April 2023. This is based on the ‘all items’ consumer price index, which includes food and energy. However, should all price increases be attributed to an increase in the consumer price index? The answer is no, and here’s why:

Veblen Goods

The law of supply and demand states that as goods and services increase in price, the demand for those goods and services decreases. For example, if I am prepared to buy two loaves of bread at $3 per loaf, I would probably only be willing to buy one loaf if the price were increased to $6 per loaf. Veblen goods create the opposite effect. People are willing to buy more goods as the price increases! A good example of a Veblen good is our cell phones. We barely use all the “new features” that come out with each new version of the iPhone; for example, we keep buying the latest one at higher prices than similar brands with comparable features and functionality. One could argue that the iPhone may be a higher quality phone, but truth be told, you could probably utilize your old iPhone 13 just as well as the new iPhone 14. That incessant craving to have the latest version, even at higher prices, is an example of “The Veblen Effect.”

Why does this matter to you?

At a time when inflation is higher than usual and the signs of a protracted economic slowdown are on the horizon, we have to be good stewards of our money. In times of economic uncertainty, it is a good idea to ‘tighten the belt’ in order to save as much as we can. If you have been blessed with abundant resources, it may not matter as much to you. For those who need to reign in spending, avoiding this effect is a must. Trying to ‘keep up with the Joneses’ could lead to unnecessary spending. This leaves you with less money to tackle more important needs, like paying down high-interest debt. This debt could include high interest rate credit cards, student loans, and mortgages.

Conclusion

A great way to avoid making impulsive spending decisions is to create a budget and stick to it. If you are able to see where your money is being spent, you are more likely to identify unnecessary expenditure quickly, thus increasing your chances of avoiding “The Veblen Effect.” Here at Financial Strategies Group, we have great tools to monitor your budgeting and personal cash flow needs. For more information and additional resources, please feel free to contact us.

Written by Kyle Cooper

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