Last Monday, I was going to make a delicious meal of Summer Carbonaro from the Half-Baked Harvest cookbook. I needed something else for the meal, so I decided to make some King Arthur Baking Company focaccia to go with it. This focaccia recipe is quite simple, with just a few ingredients:
Flour
Olive Oil
Water
Salt
Yeast
I mixed all of the ingredients in the mixing bowl for 60 seconds and then transferred the dough to a 13x9 inch pan to rise for 1 hour. After 1 hour, I was a little concerned. The dough just didn’t seem very fluffy or ready to go in the oven. Nevertheless, I thought it might rise more in the heat, so I put it in the oven.
It didn’t rise.
I was very disappointed. I knew I couldn’t serve that at dinner.
Fortunately, I had started the bread early in the day and it was so easy to make that I put together a second round. This time, though, I used a new package of yeast, and I made sure it was not close to expiring. I could immediately tell the difference in the dough. And, after that 1 hour of rising, it was nice and soft. Once out of the oven, the difference was even starker (and the pictures don’t quite do it justice). My original batch was very flat. My new batch was light and airy.
Same exact ingredients.
Completely different results.
What does this have to do with economics? Well, by now you might have guessed it: inflation! Inflation is when prices rise for all goods (on average).
Let’s pretend I was making that same focaccia bread last year. Let’s put some prices on each of the ingredients (the basket of goods I need to buy at the store) – Note: these prices are made up:
2021:
Flour: $5 / bag
Olive Oil: $10 / bottle
Water: Free
Salt: $1 / Morton’s container of salt
Yeast: $3 / 3-packet of yeast
Total cost of the ingredients I would need to buy in the store would be $19
Here are the prices for each good now (NOTE: these again are made up numbers):
2022:
Flour: $5.50 / bag
Olive Oil: $11.50 / bottle
Water: Free
Salt: $1.00 / Morton’s Container
Yeast: $3.10 / 3-packet yeast
As you can see, some goods in this hypothetical situation went up by a lot (olive oil prices increased by 15%!), some didn’t increase much (yeast increased by 3.33%), and some didn’t increase at all (salt). Overall, my basket of goods increased from $19 to $21.10. That’s an increase of 11.05%! (How did I calculate that? I took the difference between $19 and $21.10 = $2.10. Then I divided $2.10 by the original $19 = 0.1105, which when multiplied by 100 is 11.05%.)
Same basket of good.
Different overall cost (price).
To calculate inflation, you would do the same as for the ingredient costs: Take the difference in the price of the "basket" in difference years and divide by the first year.
This is essentially how inflation is often calculated with just a bigger basket of goods (and services). The basket used the Consumer Price Index for All Urban Consumers (CPI-U) includes shelter, food, energy, transportation, education, medical services, and more. Food is an important component (13.99%) of the basket. They take this basket of goods, count up how much it costs at different points of time to see how overall prices change. Energy (including gas) is also an important component (7.5%).
For a detailed explanation of the basket, check out this Pew article by Drew DeSilver and this Q&A by the Bureau of Labor Statistics.
As noted in my above example above, all of the prices did not increase at the same rate. Why is that? Well prices of goods are increasing for different reasons.
One reason that you likely have heard a lot about is a result of Russia invading Ukraine in February 2022. Prices did increase because of that (which I’ll get to in a second), but they were already rising. I wrote about high prices resulting in more expensive Thanksgivings, how Biden talked about influencing the meat market to lower prices, and how Russia was implementing export taxes (again, pre-Ukraine invasion) to combat high food prices.
Why were prices rising? It related to labor shortages resulting from COVID (physically not being able to work and changes in preferences), poor harvests, and bad weather. These reasons all led to higher prices, as did higher demand.
Then Russia attacked Ukraine.
For one, the Russian invasion led to gas prices going up. This Econ101 Washington Post article by Abha Bhattarai nicely shows the changes in gas prices over the last few years with explanations for the big changes.
Gas prices affect the basket of goods directly (in the energy component of the basket) and indirectly. Costs from transportation and delivery of goods also affect prices – and fuel is an important component of transportation and delivery
The Russian invasion also affected the prices of other goods directly. Ukraine is the largest exporter of sunflower oil so oil prices have increased. (Here is a good NPR article laying out how oil prices have changed).
Ukraine also exports a lot of grain. Since February 24th, grain has been blocked on the Black Sea. It looks like that might change soon. (Reuters article)
Point being – when we talk about inflation occurring, it’s not just for one reason. And it doesn’t affect all goods the same. Some prices increase a lot, some a little, some not at all.
For a “fun” exercise, you can see what “your” inflation rate is based on the goods you consume in this NYTimes article by Ben Casselman and Ella Koeza.
So, next time you hear inflation and wonder how it is calculated – just think of your grocery basket.
** Note: there are other ways to calculate inflation: https://www.forbes.com/advisor/investing/how-to-calculate-inflation/
King Arthur Baking Company Focaccia Bread.
You can find the recipe here:
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