What are the Economic Factors Affecting Consumer Behaviour?

Economic factors play a crucial role in consumer behaviour and buying decisions. What are the economic factors determining the consumer behaviour?

There are many reasons why this influences consumer behaviour, but broadly speaking they fall into two main categories, an individual’s financial situation and macroeconomic trends. Here we’ll touch on both.

PERSONAL FINANCE

Personal Income

The level of spending of an individual is most obviously impacted by their level of income.

In times of high inflation (as we are seeing now) a person’s level of income might remain consistent, while their level of disposable income decreases dramatically due to the rising costs of basic items and essential services.

When people have high levels of disposable income, they spend more money things like groceries and durable goods, raising their living standards, next comes more luxury items,

Other elements of personal income are:

Family income – aggregate income of the household

Income expectations – any expected increase or decrease in income

Consumer Credit

Consumer credit is the debt taken on to make purchases. Consumer credit can include any type of personal loan, but the term more regularly refers to unsecured loans used to buy everyday goods and services.

The level of credit available to the consumer, as well as the culture around consumer credit within the society, has a big impact within economic factors affecting consumer behaviour. If credit terms are liberal, customers will likely spend more on luxury goods, durables, and everyday essentials.

If the seller offers this credit directly or indirectly through banks and other financial institutions, the consumer is more likely to be approved for the credit.

Liquid Assets

Assets that are readily convertible into cash are called liquid. Stocks, bonds, and cryptocurrency are classed as having high liquidity.

ECONOMIC TRENDS

Inflation

Inflation is the measurement of the rate at which prices are increasing. Expressed as a percentage, inflation is a broad measurement across the whole of a country’s economy.

In times of high inflation customers will spend more. This is because prices are going up quickly, and what costs £1 today might cost £1.50 tomorrow. During these times, spending across the whole economy tends to increase, but fast-moving-consumer-goods (FMCG) seem to be the winners.

Interest rates

Often tied to inflation rates, the base rate of interest (the rate set by the country’s central bank) has a big impact in economic factors affecting consumer behaviour, because like with interest rates, people want to make their money go further.

In times of high interest, borrowing money is expensive. So taking out a loan or credit card in order to spend makes less financial sense. Mortgage repayments are also high, so individuals have less disposable income overall.

The other side to this coin is that it’s a good time to have money in the bank, earning that higher interest.

Interested in reading part 1 of this topic? Have a look at how social factors influence buyer behaviours.