The following comes from a news article I was reading. I regularly have this confusion set in when reading about the economy/inflation etc.
“When she looked at the receipt closely, she was shocked to see that she once paid just $2.59 for two beefy five-layer burritos.
In 2024, just one of those burritos now costs approximately $3.69, though prices differ depending on state.
– In January 2012, the buying power of $1 has the same buying power as $1.35 does as of December 2023, according to the Bureau of Labor Statistics’ inflation calculator.
– At the same time, retail food prices have generally increased by an average of 2% per year from 2013 to 2022, according to the U.S. Government Accountability Office.
– However, inflation has been steadily leveling out, climbing 3.4% in December after the COVID-era recession sent inflation spiking to a 40-year high of 9.1% in June 2022.”
If the price of something has more than doubled, then why are the numbers describing inflation always 1-9%, or $1 dollar in 2012 has the same buying power as $1.35 in 2023? I understand those numbers don’t specifically represent Taco Bell’s food, they’re the nation as a whole, but from Home Depot, to Taco Bell, to the grocery store, to my car insurance, to home prices, to medical care, to tuition, to rent prices, to car prices, everything has jumped so massively, at least these things in my life. Are there other numbers I’m just not aware of? Like I know tv’s have gotten cheaper, but it seems like the things that have gotten cheaper are few and far between, and nowhere near enough to put a dent in how much most everything else has gone up. What pulls these numbers down to 1-9%?
In: Economics
You’re missing two things. The first and easiest is that individual items are not pegged to inflation. Inflation is calculated as a very generalized, averaged-out increase based mostly on certain essentials and important markets, like housing and cars and groceries. Burritos might have doubled, but maybe cars barely budged in that time. The *average* inflation stays in the 1-9% range. Similarly, inflation over the course of an entire year might be 1-9% even if there are a few months with a drastic increase that is very surprising.
The more complicated thing you’re missing is that inflation is *compounding*. Each year it increases, and that increase *also* increases with the next year. Let’s say something in 2012 costs $10, and we’ll assume a very steady, oh, 6% inflation. After one year, in 2013 that item will now cost $10.60. When we say that inflation in 2013 is still 6%, that’s not 6% of the original 2012 price of $10, it’s the 2013 price of $10.60. So in 2014, that 10.60 plus 6% becomes %11.24.
2015 -> 11.91
2016 -> 12.62
2017 -> 13.38
2018 -> 14.19
2019 -> 15.04
2020 -> 15.93
2021 -> 16.89
2022 -> 17.91
So you can see that over the course of ten years, the price has gotten close to doubling, from $10 to almost $18! And only from 6% inflation! That happens because each increase *compounds* with the next one and the next one… A very small amount of inflation over time really adds up to huge increases. Note also that this is calculating it *annually*, so the increase only happens once per year. If we calculate the compounding increase every month, the end price is $18.19.
If you put both of those things together, you can hopefully see how individual markets can really shoot up even if the average inflation seems pretty low. If the average is 4~5%, but eggs are above the average at like 12~15%, the price of eggs will go up very very quickly.
Of course, here I’m doing the process backwards from inflation. I’m using inflation to calculate new prices when it really goes in the opposite direction: prices are used to calculate what the rate of inflation is. But hopefully you can see from this that small increases that happen periodically add up to very big increases over time. Incidentally, you can (and should) apply this same logic to things like interest rates on loans, and return rates on investments. If you take out a 30 year mortgage on a home, yeah 6% doesn’t seem like that much. Six percent of a $250,000 loan? That’s only $15,000! That’s a lot, but not a *whole* lot. Except, no, it’s 6% compounding interest, every single year. If you waited all 30 years to pay any of it off, you’d owe $1,505,643.80! So, you know…don’t wait, pay off your debt as quickly as you’re able.
Conversely, a 6% return on an investment doesn’t sound like much, but if it’s a retirement account and you’re just going to let it grow for 30 years, it’ll be a lot of money by then.
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