By Veronique Mintz
That Seven Grams or Dunkin coffee you take for granted every morning may not be worth the splurge anymore. Here are some fast facts: according to NPD Group data, one cup of coffee now costs an average of $4.90 nationwide (and that’s without oatmilk, sugar, or creamer!) As of July, inflation rose to a four-decade high. The solution? Make coffee at home. But wait–coffee prices in July increased by 20.3% from this time last year. This may seem like something that is an “adult issue,” however interest rates have reached their peak and are projected to not come down for the foreseeable future. Prices are still rising as you take the time to read this article. Inflation is having a direct impact on our very own teachers at LREI. English teacher Anna Gonazales described the change in her morning routine: “I bought a bagel sandwich at Court Street Bagels in Cobble Hill this morning and usually this bagel is $6.25 and this morning it was $7.50. At the same time, my salary, along with that of other teachers at LREI, is not going up with the rise of inflation. We got a 3% raise last year but inflation went up by 8% so technically we got a 5% pay cut. And now I have less bagel money.”
Essentially, inflation is the increasing price of goods and services over a certain period of time. “This means that your money is worth less each year, unless it is gaining an interest rate greater than or equal to inflation” (Matthews Business Insider). Inflation normally rises 2% per year, which is an ordinary occurrence in our economic system, although our current economy is well surpassing this rate. It comes down to understanding the basic scarcity principle of economics: “the price of a good, which has low supply and high demand, rises to meet the expected demand” (James Chen, Investopedia). Market equilibrium plays a role in this economic theory; this is when supply equals demand. For example, if Exxon buys 600 gallons of gasoline for inventory one week and 600 gallons are purchased by consumers cumulatively, market equilibrium is achieved.
However, it is difficult for markets to stay at equilibrium for an extended period of time due to a number of key factors: First are supply chain issues, in which demand for specific goods and services exceeds supply. Our economy is mainly composed of behaviorists (people), not rationalists (econs), meaning that equations solved by forecasters may work in theory, but rarely predict the decisions that humans will make in practice. Economists rely on the notion that “we shouldn’t worry about people taking out 95% mortgages or 100% mortgages or ‘trust-me mortgages’ because they’ll only take out those mortgages if they’ve made all the relevant calculations” (Thaler). Most critical in financial decision-making, economists assume a cost-benefit analysis is conducted. This is a problematic view because humans act on emotion and in unpredictable ways.
The three main factors impacting inflation are devaluation, money supply on the rise, and government policies. Devaluation is the decrease in a country’s exchange rate, which leads to the country’s currency being worth less than before. Secondly, money supply is on the rise; this is the total amount of money in circulation, encompassing cash, coins, and balances and bank accounts. The Federal Reserve is the U.S. central banking system; it was implemented by congress in order to “provide the nation with a safer, more flexible, and more stable monetary and financial system,” as stated by The Federal Reserve. The Fed is a prominent figure in the news during this time of inflation, considering the Fed’s role is to set interest rates, maintain money supply, and regulate financial roles, so they have a direct impact on inflation and the state of our economy. Lastly, government policies contribute heavily to inflation. When the government issues tax reductions for certain products, usually necessities, demand can escalate. If that demand exceeds supply, costs will increase, according to Business Insider.
This all may seem discouraging and understandably so, which is why the U.S. House of Representatives passed Joe Manchin’s Inflation Reduction Act (IRA) of 2022 on August 12th. The Inflation Reduction Act saves Americans money by investing in American manufacturing to mitigate supply-chain issues and creating more appealing jobs through financial incentivization: tax breaks will be rewarded to companies that utilize/build energy efficient buildings and pay their workers higher wages. It also focuses on lowering healthcare costs and improving tax fairness. This is done by guaranteeing that Medicare patients will pay no more than $35 for their medication, and holding the ultra wealthy accountable by imposing a “15% tax on billion-dollar companies, […] while not increasing taxes on small businesses” (Manchin Inflation Reduction Act of 2022)
Next time you think about getting that Seven Grams or Dunkin’ coffee, take into account the supply-chain involved in making that coffee, and whether you can find a better option that is not as impacted by inflation. Inflation affects your parents’ ability to buy groceries for your favorite meal. Inflation causes your family friend’s small business to close. Inflation even affects your Grandparents’ access to medication. Those empty storefronts you walk by on your walk to school…inflation. Think carefully about the decisions you make before acting, then think again.