Wouldn’t we all feel so much better if prices just came down?

This post is a teaser for my crash course on inflation, coming in January.

My nearly 90-year-old father eats the same thing every day for breakfast: Cheerios with milk, coffee, and a glass of orange juice. He eats something easy to make for lunch and for supper too. His grocery bill is simple. In 2022, dad told me he wasn’t worried about inflation, the general rise in prices we’d been seeing since the pandemic. 

For much of his life, he worked for a big oil company, so he knew the price of gasoline would fall. (In March, we’d experienced the oil supply disruptions at the start of the war in Ukraine.) It did, from a nationwide average high of $5.03 in March 2022, with another spike in June to a low of $3.45 in December 2022, according to the US Energy Information Association. 

Dad’s only complaint was that the price of pet food, especially cat food, which had really jumped. My husband and I noticed the same thing. Cat food made up about 40 percent of a single grocery bill in April 2023. Add cat litter and it was even higher.

Talk about sticker shock! When we bought meat (mostly chicken and ground beef) a few weeks later, it was cheaper than the cat food. We had three cats then and are down to two, but cat food still makes up a huge chunk of our grocery budget.

Like my father, the increase in the price of gasoline didn’t bother us, since my husband worked from home and has since retired, and I don’t drive. The price of other staples went up as well, but the change in the price of pet food was the one that caused sticker shock. Unfortunately, the price is “sticky.” Once the price went up, cat food prices stayed up and they’ll continue to rise.

For others, such as retail bakers, the change in the price of eggs was a hardship.

As was true of gasoline prices following the war in Ukraine, the change in the price of eggs was also the result of a supply shock—breeders had to kill over 43 million egg-laying hens because of an avian flu outbreak. In 2022, the price had increased by 267 percent from February to December. These prices are not sticky, and according to the USDA, once there were more layers (hens are either layers or breeders), prices dropped.

Prices that “stick” are one of the problems with inflation. Some prices are more competitive, such as eggs and gasoline, because there are a lot of retail suppliers. Some prices ratchet up (as a ratchet does), or stick, such as cat food and packaged goods, because they are less competitive. For example, there are three main producers of cat food: Purina, P & G, which makes Iams, and Big Heart Pet Foods, which makes 9Lives.

Rent, a big portion of household spending, also exhibits a ratchet effect. Once rents go up, they usually won’t come down. Rents were a persistent problem in the battle against the pandemic-era inflation. For instance, in the Atlanta area, rents rose by 23 percent from 2021-2023, according to the Washington Post.

Wages also exhibit a ratchet effect. The problem with the ratchet effect (or sticky prices) is that new prices become a basis for future price increases. For example, suppose Dave has a job as an internet technician. His wage rose from $55,000 to $60,000 in 2022 to keep him from leaving. Suppose Dave’s firm awards a 3 percent standard raise to employees. 

Moving forward, as Dave makes more money, the monetary value of this raise will increase each year. In 2023, the raise of $1,800 will be based on $60,000 not the $1,650 raise from $55,000 These new higher wages will determine Dave’s future wages and raises.

If wages, rents, and other prices are sticky (they go up, but they won’t go back down easily), then inflation can become entrenched, causing continued price increases in the future. Entrenchment didn’t happen because the Federal Reserve raised interest rates.

In the rest of my crash course on inflation, well dig deeper. We’ll start with problems, move onto causes, and then finish with how the policy of raising interest rates helped lower the inflation rate.

Thank you for reading this new improved version of this article.

Nikki