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 $1.35 in 2023? I understand those numbers don’t specifically represent Taco Bell’s food, they’re the nation as a whole, but from Home Depot, to Taco Bell, to the grocery store, to my car insurance, to home prices, to medical care, to tuition, to rent prices, to car prices, everything has jumped so massively, at least these things in my life. Are there other numbers I’m just not aware of? Like I know tv’s have gotten cheaper, but it seems like the things that have gotten cheaper are few and far between, and nowhere near enough to put a dent in how much most everything else has gone up. What pulls these numbers down to 1-9%?
In: Economics
it could be because wages haven’t increased with inflation. so things get more expensive, and people aren’t making as much money, relatively.
-not an economist by any means
Because that’s just ONE ITEM doubling.
That 1-9% value, whatever it is, is an AVERAGE of literally EVERYTHING bought and sold in an economy. Or as close as researchers can get for measuring everything.
So sure, Taco Bell burritos have gone up, and many other things have gone up. But also many other things haven’t really changed, or even gone down.
Like for example of products that have gone down in price, electronics have dropped significantly. You can get a giant TV that would have cost you 1,500 dollars in 2010 for like 400$ now. And it can connect to the internet. With the rise of budget airlines the price of air travel has decreased on average.
So, averages. When you take a survey of Hundreds of different items, one or two drastically increasing doesn’t cause a huge shift % wise
A few considerations to keep in mind:
The annual inflation numbers are just that: annual. So if inflation is 9%, thats an estimated 9% increase from one year ago. Any increases in the next years are compounded on that prior 9% increase.
Also, the inflation number is averaged across almost everything you can buy – some stuff will be much higher, some might have barely moved.
And when citing a specific merchant, there could very easily be some price increases unrelated to inflation, purely for pricing power.
Inflation is determined by the average price paid by consumers for a number of goods and services. This includes:
* Food at home
* Food away from home
* Energy commodities
* Gasoline (all types)
* Fuel oil
* Electricity
* Utility (piped) gas service
* New vehicles
* Used cars and trucks
* Apparel
* Medical care commodities
* Shelter
* Transportation services
* Medical care services
The problem is if you look at any one sector, or even a specific item like a Tacobell burrito, you will get an inflation number way off the average.
Just couple examples:
Well, gas prices for one — actually down a couple percent since Jan 2012. ([U.S. All Grades All Formulations Retail Gasoline Prices (Dollars per Gallon) (eia.gov)](https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epm0_pte_nus_dpg&f=m).
Anything electronic, not just televisions, is far far cheaper. Including things like cell service plans.
New car prices are up, but only by about 20%. [Consumer Price Index for All Urban Consumers: New Vehicles in U.S. City Average (CUUR0000SETA01) | FRED | St. Louis Fed (stlouisfed.org)](https://fred.stlouisfed.org/series/CUUR0000SETA01)
Clothing is up less than 5%. [Consumer Price Index for All Urban Consumers: Apparel in U.S. City Average (CPIAPPSL) | FRED | St. Louis Fed (stlouisfed.org)](https://fred.stlouisfed.org/series/CPIAPPSL)
You just notice the stuff that’s increased more recently, because it (quite reasonably) pisses you off. But the numbers do check out.
Yearly inflation compounds, because it’s based on the new, inflated, value.
If inflation is 10% per year (to make the math easier), then after one year, it’s at 110%… but the next year you increase 110% by 1.1x, which is 121%, not 120% (if you just said 100% + 10% + 10%).
Over several years, that adds up even more. 5% per year for 10 years isn’t 50% inflation (5% * 10), it’s ~162%.
They seem off to me too. Ten years ago, our credit card bill was about $1000 per month. Now it’s around $2200 per month. We spend money on everything so it’s a good metric of inflation. Back then our two biggest expenses were food and gas. We retired since. Now our two biggest expenses are food and medical insurance.
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.
Don’t listen to these dumb comments. Your intuition is correct. The way they calculated inflation in the 80s has completely changed today. The government (at least America and Canada) has changed how they calculate their inflation statistics to make it seem less bad. The number they give you today is not even close to accurate.
Think about this, they have increased the money supply at a faster rate than any time in HISTORY (Canada and USA), yet the inflation statistics they put out aren’t even that bad compared to other times in history (when they calculated it properly)
A burrito doubled in price, a TV dropped its price in half. A car went up 50% and plane tickets dropped a similar amount.
Also keep in mind that inflation is cumulative. If something costs $100 and inflation goes up 2% (on that item, forgetting the average stuff for now) it costs 102. But if inflation next year is 3%, it’s not 3% of $100, it’s now 3% of $102. So inflation compounds. Usually when they report inflation they report the year-over-year number (compared to last year), but when we look at things we often look back 10 years or more. If inflation was 3% for 10 years straight, it would go up 34.39% (3%^10 or 1.03*1.03*1.03…)
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