The Double Threshold Effect Of Inflation On The Consumption Expenditure Of Residents From Different Income Levels

Inflation is becoming the main risk in China’s economic development, whichaffects the people’s consumption demand. At the same time, since the reform andopening up, China’s current income distribution system led to polarization between therich and the poor, which caused the low social consumption rate. The residents fromdifferent income levels have different consumption planning, so the impact of inflationon consumption expenditure is likely to be nonlinear. Based on the threshold model, thispaper discusses the effects of inflation on the consumption expenditure of residentsfrom different income levels.This paper includes following contents: a review of study of the relationshipbetween inflation and consumption expenditure from domestic and foreign scholars;through statistical calculation of empirical data, analysis of the changes in inflation,Chinese residents’ income and consumption expenditure in recent years; theory analysisof the effects of inflation on the consumption expenditure of the household fromdifferent income levels; according to the threshold value, it divides consumers intodifferent levels and tests the effect of inflation on of consumption expenditure ofresidents from different income levels, using the econometrics method of thresholdregression model.Through the calculation of empirical data, it finds that price index fluctuationsexactly correspond to inflation of our country over the years; inflation due to excessliquidity and reflects distinct structural characteristics; the income gap is widening,which affect the entire social consumption ability; the residents’ income andconsumption expenditure is different in each region, and the difference between townsis larger than that in rural areas.The relevant theory includes Theory of Consumer Behavior, Relative IncomeHypothesis, Life Cycle Hypothesis, Permanent Income Hypothesis, Random-walkConsumer Theory, Buffer–Stock Saving Theory, Dual-effect Theory, Inflation StructureTheory, Error Correction Theory and so on. Through income effect, substitution effectand wealth effect, inflation affects consumption propensity of residents from differentincome levels. The threshold regression model test results show that inflation promotesconsumer spending and inflation has a significant threshold effect on consumerspending. That is to say inflation’s influence on resident consumption expenditure is different among different income levels. The higher income level residents from, thegreater promotion effect inflation has on consumption expenditure. Finally, this papercomes to a conclusion and puts forward relevant policies such as adjusting inflationexpectation, promoting the reform of income distribution system, establishing socialwelfare and security system of urban and rural areas etc.