‘It’s up, up, up:’ The inflation rate is 6.8%. Here are the many reasons

U.S. economy roaring back from pandemic, but it’s showing in inflation rate

Michele Bourassa watches as husband Zeynel Gulsoy rolls out dough for an order at Zeytin Turkish Cuisine in Orlando. (Christie Zizo, Copyright 2021 by WKMG ClickOrlando - All rights reserved.)

ORLANDO, Fla. – Michele Bourassa is wrestling with a big change in the new year: raising the menu prices at her Orlando restaurant, Zeytin Turkish Cuisine.

“Because I’m so connected to all the customers here, we really don’t want to raise the prices. But we have to,” Bourassa said.

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It’s a decision she and her husband have tried to avoid for months. Now the question is, do they even bother putting prices on the new menus?

“We’re not sure if we should put prices on the menu or not put prices, because every time we go it’s up, up, up,” Bourassa said.

The problem: inflation.

The current year-over-year inflation rate, from November 2020 to November 2021, is 6.8%. It’s the largest increase in the inflation rate since June 1982, according to economist Steve Reed at the U.S. Bureau of Labor Statistics.

The hike in prices is being felt in nearly all quarters of the consumer economy. There is a myriad of reasons for it.

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The Consumer Price Index

The rate of inflation is measured using the Consumer Price Index, a survey of the prices of thousands of goods and services.

“We’re measuring the prices of things that you or I might buy for our families,” Reed said. “When you hear about the inflation rate, that’s usually the Consumer Price Index that’s being referred to.”

The index is calculated monthly by BLS economists. Every month they survey the prices for products and services at 75 metro areas across the country. Those prices factor into the overall inflation rate.

The CPI shows that bacon prices, for instance, are up 21% over the last year.

“We have a sample of prices, it’s thousands and thousands of specific items, and for bacon it would be probably a few hundred bacon items across the country, so we are measuring prices of specific, you know, it would be a specific brand and quantity of bacon at a specific store,” Reed said. “And we’re just showing that these prices we’re collecting are in fact, getting higher.”

For Michele Bourassa, those price increases hit the most basic and necessary items in the restaurant.

Zeytin's chef Zeynel Gulsoy skewers ground lamb for lamb adana. Zeytin's owners say the price for a case of lamb has more than tripled over the past year. (Copyright 2021 by WKMG ClickOrlando - All rights reserved.)

“Say one case of lamb is $90 normally. Now, it’s almost $500. The same case. It’s like tripled, more than tripled,” she said. “Our hinged deli containers that we use for takeout, was 200 containers for say $36. Now the same exact 200 containers are now $160.”

Generally, an inflation rate of 2% year over year is considered healthy.

Direct and indirect causes

Most of the causes of inflation, according to Reed, are things that have gotten lots of attention in the news lately – supply chain issues and shortages, energy prices, high consumer demand.

“You’ll note that the gasoline index is actually up 58% over the past year,” Reed said. “So that has a direct effect on the CPI but it also has an indirect effect because it makes things more expensive to transport and causes other indexes to rise.”

The national average price for regular unleaded gas is $3.31 a gallon, according to AAA. A year ago, with the pandemic’s worst effects on the economy just starting to wane, gas prices were at $2.19 a gallon. During the worst of the pandemic, we saw prices below $2 a gallon.

Reed says it’s simple supply and demand.

Bourassa says straws, for instance, are difficult to come by. Finding a box of straws at a place like Costco or Restaurant Depot is a big deal. Many things are out of stock.

“This is the first year we’ve had real difficulties with everything, pretty much,” Bourassa said. “It’s everything, straws, napkins, the simple takeout containers have quadrupled in price.”

Uluc Aysun, an associate professor of economics at the University of Central Florida, points to another concept that would appear to affect all the others – base effects.

“Inflation was low during the pandemic,” Aysun said. “It wasn’t growing as fast or independent, right? So you hit these low levels. Now when it goes back to more normal levels of growth, you’re going to see an increase when compared with last year, you’re going to see an increase in inflation.”

In 2020 the annual inflation rate dipped to 1.2%. Consumer spending fell to low levels and businesses dialed back on supplies and services to make ends meet.

A great example of this is the rental car industry. With no one traveling, rental car companies sold excess vehicles in their fleets to save costs.

But now, consumers are traveling again for work and for vacation, buoyed by stimulus checks and, in some cases, higher wages. But the rental car companies don’t have the fleets they once had, and there’s a trickledown problem – a shortage of new vehicles caused by a number of issues, including a microchip shortage. As a result, car and truck rental prices are up 37.2% this year.

Aysun says these base effects haven’t worked through the economic system yet.

“You’d have to wait until I think the second quarter of 2022 for that to, you know, reset that way,” he said.

Pressure from the Fed

Another concept Aysun says is a factor in inflation, and one that he says Federal Reserve will need to put pressure on, is inflation entrenchment – the idea that prices are going to go up anyway, so businesses might as well keep raising them.

“All these (issues) were seen as more transitory by the Fed up until I would say two, three months ago,” Aysun said. “Now they’re changing the narrative and seeing that inflation might be here to stay. This again, I think is related to this entrenchment idea where inflation starts to become more permanent and harder to wring out in the economy.”

The U.S. Federal Reserve, the nation’s central bank, was founded as a way to monitor the U.S. financial system and provide course corrections when possible to keep the economy stable. We hear a lot about the Fed when it comes to key interest rates, which the system has kept low over the last decade.

The Fed also has a hand in inflation and can do things that can lower inflation. But there are risks.

“The Federal Reserve has the capability to bring inflation down,” Aysun said. “They are currently buying bonds, they’re still giving incentives to the economy. They have signaled that they’re going to stop doing that.”

Aysun says that after that the Fed may finally raise interest rates, which economists believe will happen in the middle of next year. This will cause the economy to pull back because people will be more likely to hold off on buying if interest rates are higher.

It will be up to the Fed to signal that they will do everything in their power to bring interest rates down to fight that entrenchment.

“It’s all about Fed policy, about signaling,” Aysun said. “The Fed Chair has to be credible, has to stand in front of cameras as they always before the meeting and say ‘we’re gonna bring inflation down’.”

‘It’s going to take a lot of force to slow it down’

How will the high prices come down? It depends on how all the factors shake out – the supply chain issues, the energy prices, the shortages, the base effects and entrenchment.

“Once the sources of those inflationary pressures stop, then we would tend to expect prices to revert to the more usual pattern, I suppose,” said Reed, the economist at the U.S. Bureau of Labor Statistics. “And that gets complicated because once people start expecting inflation it can get built into contracts and sort of perpetuate itself.”

“It’s like a truck that’s traveling on the highway, let’s say it’s going 80 miles an hour,” Aysun said. “So it’s not going to go to zero the next second. It’s going to take a lot of force to slow it down.”

Aysun says any course correction for the Federal Reserve comes with a sacrifice. If prices come down too fast, it could lead to job losses as businesses pull back growth.

For Michele Bourassa though, getting prices to just stop growing so fast would be some relief. She and her husband had staff before the pandemic, but they haven’t been able to bring them back. They’d like to get back some of those employees since customer demand is soaring.

She and her husband are the only two people staffing the restaurant.

“We run this restaurant barebones. If we had too many employees it would cut profits,” Bourassa said.

But she and her husband don’t want to sacrifice the quality of their food just to gain a pair of helping hands.

“It’s all organic, all from scratch, not frozen or from a box. So (my husband) doesn’t want the quality to go down, it just wouldn’t be the same.”

About the Author:

Christie joined the ClickOrlando team in November 2021.