Recently, I went to get lunch off-campus with some friends. Being a high schooler with little money, I wanted to find cheap snack options. I’m well acquainted with the food stores in Downtown Berkeley, and have my usual stores with some typical snacks I buy. But, I was left boggled when I noticed prices for some of my regular snacks. All items, except one, on my habitual snack shelf now cost 4 dollars, if not more. Inflation is a word we all hear thrown around the news. Yet it isn’t until situations like these where my wallet truly feels the heat of inflation.
One calculation from December 2022 presented an over 300 percent rise in the price of school lunches, over 50 percent in egg prices, and America’s favorite beverage, coffee — a rise of 15.5 percent, according to CNBC. What caused these high prices?
We are currently in a demand-pull inflation scenario. Simply put, there is more demand for certain things than supply. This causes the prices of those goods to rise. For example, gas prices soared in early 2022 after energy supplies fluctuated due to the Russia-Ukraine war. Another factor behind higher prices is the overall higher wages. This is cost-push inflation in which prices are driven up because buyers have more money to spend. U.S. unemployment was at a low of three and a half percent in 2022. This means that many people were employed and consistently earned wages that they could spend on goods. The stimulus checks distributed during the pandemic also provided people with money to spend and the ripple effects of that can be seen through the 2022 inflation.
In sum, prices went up because people were employed and earning, contributing to an influx of money into the economy. But, as an unemployed high school student, I’m left contemplating when I see a $4.99 baguette that used to be $2.99. When I returned from lunch and mentioned it to some classmates, they agreed that things around downtown have gotten slightly more expensive. One even mentioned that the expense is more noticeable now that they have to pay using their own money.
One startling fact is that inflation is not actually irreparable. As of December 2022, inflation was recorded at 6.5 percent in the U.S. This 6.5 percent is a notable drop from the July 2022 peak of just over nine percent and the seven percent in November 2022. So, what’s causing the drop? You may recall a headline from a couple of months ago about the Federal Reserve Board (FED) raising interest rates. The FED raised interest rates throughout 2022 and plans on continuing to do so in 2023. Interest rate can be simply thought of as the price of money, because it is essentially the amount you have to pay when you take out a loan, in addition to repaying the loaned amount. When interest rates rise, fewer loans are taken out. As a result, the economy starts to slow down, meaning lower prices!
Why is inflation still nearly double the average? We are currently in a lag period, in between peak inflation and lower inflation due to high interest rates. But, the drop in inflation between July to December is evidence of the high interest rates’ effectiveness, providing us hope for the future.