Giving up a daily coffee or weekly parma? How the cost-of-living crisis is reshaping our spending habits

Remember when grabbing a coffee was just… grabbing a coffee? When a parma at the local was a budget meal? When Friday night takeaway was a reward for getting through the week? It didn’t require a financial spread sheet.

For many families navigating the cost-of-living crisis these small indulgences now have to be accounted for. They’re not just automatic purchases.

We’re not just cutting back on buying large discretionary items, like new cars. The impact of inflation on household budgets has fundamentally reshaped our relationship with food, social connection and small pleasures.

The current cost-of-living crisis can also create new spending habits. The ways we restructure our budgets can have lasting effects on our lives and local economies.

Price anchors

What five years ago was a A$3.80 coffee has now become $5.50 with some options as high as $7.00.

Despite the price change, customers have a mental reference point of what a coffee should cost from the pre-inflationary period.

Behavioural economists refer to this as “anchoring” – a rule of thumb price that purchase decisions are judged upon.

So if you are used to paying $5 for a daily coffee, any price above this is beyond what you see as reasonable value for money.

Look at parents at weekend sports matches. You’ll notice the increasing presence of the insulated mug full of homemade coffee, replacing the takeaway coffees from the local cafe.

For my family, Friday night was pizza night and $50 would easily feed a family of four. Then the inflationary price creep started. For us $70 was the tipping point. When the same order cost more we started making pizzas at home.

Mental accounting

Nobel laureate Richard Thaler introduced the concept of mental accounting in 1985, as a model of how we allocate money into to different categories for spending.

If the price is above our threshold point we mentally reassign its purchase to one of our other spending categories. It might shift from being an everyday item in our household budget to an occasionally purchased item.

Decision fatigue

During an inflation-fuelled cost-of-living crisis, we face not only financial strain but also significant decision fatigue from constant price revaluations.

This cognitive burden emerges as mental exhaustion when making even routine purchases.

Increasing pressure on our finances can trigger a scarcity mindset that consumes our thinking and affects our decision making.

Our focus shifts to immediate needs, such as paying weekly grocery bills, instead of long-term financial planning for a holiday or retirement.

The social cost

These new purchasing habits and economic shifts also have implications for our social connections. The cafe, the pub and takeaway night are not only about food but they are about community and building social connections.

The so-called third place is the place between work and home where you can be part of the community.

Buying goods is often accompanied by an exchange of conversation. As the cost-of-living crisis continues making fewer purchases reduces opportunities to connect.