THE EROSION OF FINANCIAL WELL-BEING: ANALYSING THE IMPACT OF INFLATION ON LIFE SATISFACTION

Abstract

This paper finds the association between inflation, financial satisfaction and life satisfaction. The erosion of real income due to high inflation has substantial implications for people’s economic stability and, in turn, their satisfaction with life. By examining various psychological, sociological, and economic perspectives, this research aims to highlight how inflationary pressures influence people’s financial stability and subjective well-being. Using the happiness survey data, a robust body of literature has supported that people’s subjective well-being is linked with economic growth, employment, and inflation. Inspired by “Happiness Economics,” this paper emphasises financial satisfaction, a proxy of subjective well-being. It observes the association between people’s financial satisfaction and countries’ macroeconomic performances. We take financial satisfaction as the dependent variable and demographic variables like sex, education, income level, marital status, age and employment status as control variables. We collect cross-sectional data for all countries in the years 2018 and 2019 from the World Values Survey (wave 7). We use macroeconomic variable like inflation as independent variable, collecting data from the World Bank and some from the International Monetary Fund. We use the generalised structural equation model for the analysis. The results show that financial satisfaction is inversely related to inflation. The overall results suggest policymakers should strive to mitigate the economic vulnerability of men, young adults, low-income earners, those with low education, married/cohabiting individuals, and the fully employed to maximise financial satisfaction and promote subjective well-being.