<p>Visible inequality influences how households allocate expenditure between essential goods and status oriented consumption. While standard demand theory emphasizes income effects and Engel’s law, social comparison and relative status concerns may induce households to divert resources toward conspicuous goods when disparities are locally salient. This paper develops and tests a Veblen–Engel trade off framework in which rising inequality increases incentives for status signaling while reducing the share of spending on basic needs. Using nationally representative data from India’s Household Consumption Expenditure Surveys for 2022 to 23 and 2023 to 24, households are classified into low, medium, and high inequality environments based on dispersion in conspicuous spending within reference groups. Population weighted regressions are estimated for both expenditure levels and budget shares of conspicuous and food consumption, controlling for income, demographic characteristics, and fixed effects. The results show that higher inequality is associated with significantly higher conspicuous consumption and larger conspicuous budget shares, alongside reductions in food expenditure and food shares. These reallocations persist after accounting for income and are stronger among poorer and socially marginalized households. The findings provide evidence that inequality operates through behavioral status competition that crowds out essential consumption, thereby generating hidden welfare costs and reinforcing consumption based disparities in developing economies.</p>