Inflation 101

Food for thought

Meat, poultry, fish, and eggs cost more today than they did a year ago. Four percent more, in fact. This is not necessarily inflation, though it’s hard to wrap your head around this when you’re at the checkout.

Inflation is a general rise in prices across the board. It affects all prices, not just a few. The bacon you bought that gave you sticker shock is just one price, albeit a potentially important one for some households. Rising prices in food, gas, or other commodities that keep your household running can prompt us to make adjustments in our lives—perhaps squeezing in three errands on one run to save on gas. While these choices can tell us something about how households are faring, they don’t tell us much about inflation itself, which has much broader implications for the economy as a whole.

Inflation is usually measured by tracking the prices of a broad basket of goods and services, such as with the Consumer Price Index (CPI). The CPI is a weighted index of a typical consumer’s market basket, which does include food, though its weight is only roughly 15 percent of the basket. In that way, rising food prices in general do affect the CPI, but there are a lot of other components to consider as well.

Food prices can also be affected by things like poor weather conditions: the freezing temperatures in the Northeast, drought in the West, snow in the Midwest. Bad weather can, for example, prevent the transportation of food supplies to processors and retailers, driving up prices temporarily. But that’s just it: These types of price changes are temporary, not an indicator of a longer-term trend.

Another thing to keep in mind when it comes to commodity prices: basic supply and demand. A shortage of, say, oranges because of drought in the West prompts a price increase, encouraging people to buy fewer oranges. Apples, on the other hand, may have a great harvest and be abundant; their price goes down, encouraging people to buy them instead. In this way, a balance is struck.

Inflation or not, rising food prices are frustrating for consumers, and something that economists do keep an eye on lest they turn into broader inflation. If, for instance, drought continues and livestock levels don’t pick up in the West, rising food prices may be more than just temporary and could feed into the longer-term outlook for inflation.