How Inflation Explains the Price of Coffee

Have you ever wondered why the price of a coffee at the coffee shop costs $5 today when it was only $3 a few years ago? Did the coffee become better? Not really. The answer to this question lies in inflation, a concept that makes everything - even necessities - more expensive over time.

What is Inflation

Inflation is the rate at which prices for goods and services increase over time. In simple terms, as inflation rises, your money does not go as far as it used to. This EconBite will explain this concept with a necessity: coffee.

A Breakdown

Let’s start with a cup of coffee. Coffee shops don’t just charge you for the coffee itself. They have to pay for beans, milk, sugar, cups, employees, rent, and more. As inflation occurs, the costs start to increase. For example, if the price of coffee beans increases because of higher farming or transportation costs, the shop owner will likely increase the price of a latte to cover the extra expense.

Supply Chain Ripple Effects

Inflation does not just affect coffee beans. It has impacts on the entire supply chain. Let’s say gas prices soar due to inflation. Then, it is more expensive to transport the coffee from farms to roasters and from roasters to ships. The costs get passed to the customer in the form of higher coffee prices.

Why 2% Inflation Isn’t Always Bad

The twist with inflation is that a small, steady inflation rate (roughly 2% per year) is actually healthy. The increase encourages spending and keeps the economy moving. If prices never changed, businesses would have no reason to expand, and wages would never increase. So while coffee might be a bit more expensive, it means that the employees are likely earning more too.

Hyperinflation

Now, imagine a $5 latte suddenly costs $50. That's an extreme example of hyperinflation where prices rise uncontrollably. It is very rare but it happens. When it does happen, the economy can collapse because people lose confidence in the value of money.

Takeaway

Next time you drink a cup of coffee, think about the economic forces at play. Inflation is not a buzzword; it is why a latte can cost significantly more after a number of years. And while the price change might seem daunting, remember that inflation is what keeps the world running smoothly.