By Will Cornelius
The Surveyor

In July 2023, a pound of ground roast coffee cost $6.14 on average across the country. Two years earlier, in July 2021, that same pound of coffee would only set you back $4.56. That 35% increase in the price of ground coffee is due to inflation.

Inflation reached a four-decade high of 9.1% on an annual basis according to the Consumer Price Index (CPI) during the summer of 2022. The CPI is a monthly measure of the change in prices for a basket of different goods and services that the average consumer uses. Earlier this month, the CPI was released for July 2023, showing inflation had fallen to 3.2% on an annual basis.

“Driving inflation lower has been largely the Federal Reserve increasing interest rates,” said Stephan Weiler, an economics professor at Colorado State University. “It makes everything more expensive, all loans become automatically more expensive.”

At the beginning of 2022, interest rates were effectively 0%, this made borrowing attractive and encouraged spending. Car loans and mortgages offered low rates and incentivized people to spend and buy. But this also helped unleash the inflation monster. In response, the nation’s central bank—known as the Fed—began a series of interest rate hikes in the spring of 2022 to combat inflation.

At the end of last month the Fed continued this and increased the Fed fund rate to 5.25%-5.5%. The Fed fund rate is the interest rate banks borrow and lend money to each other to meet reserve requirements. It is the Fed’s key tool to ease inflation with higher interest rates flowing onto consumers. “It’s pretty impressive. We’ve gone from over 9% to 3.2% inflation,” Weiler said, explaining the Fed’s effectiveness in subduing inflation.

A pernicious dynamic of inflation is how it affects products and people differently. For example, the July 2023 CPI report showed that airline fares were down 19% over the past year, but at the same time, motor vehicle insurance rose 18%. Geography is another area that can change how people are impacted by inflation.

“The main thing is basically the isolation and therefore the transportation. It costs more money to take goods to rural markets,” Weiler stated. He explained how this affects residents in Berthoud specifically. Depending on the location in Berthoud, it can take 10 to 15 minutes to drive south to the Walmart in Longmont. “Once you add it up over a year, it starts actually making a difference,” he said. With gas costing over $4 a gallon, driving to Walmart once a week from Berthoud in a Ford F-150 for groceries will cost two extra tank fill-ups over an entire year. The food index portion of CPI incresed 4.9% annually in July 2023. In July 2022, the annual increase in the food index was 10.4%, the highest annual percentage change since 1979.

Weiler explained that other factors can also make living in a rural area more expensive. Medical services are typically clustered in larger cities, making it more expensive for rural residents who typically skew older. Not having fast internet broadband can be another hidden cost of living in a rural area for working-age residents too. “The more isolated you are, generally the higher the inflation rate is going to be,” Weiler said.

Asked about what to expect from inflation for the coming year, Weiler was optimistic. “I think it’s going to continue to decrease, but probably not in big chunks. It’s going to slowly decrease towards 2% because it’s always the last percent that’s difficult.” The Fed’s goal is for inflation to average 2% over time.

While inflation has fallen significantly, economists and policymakers have been concerned that the rise in interest rates will send the economy into a recession. However, data from the second quarter showed that U.S. gross domestic product (GDP) expanded by 2.4% annually, beating Wall Street’s expectations. “Everybody’s been waiting for the recession, but I’ve sort of been a stubborn ‘soft-landing’ person. And I think I may be right,” Weiler commented. The ‘soft-landing’ belief is that the Fed can raise interest rates to bring down inflation while avoiding a recession.

One of the big reasons the U.S. has avoided a recession so far is a resilient labor market that keeps hiring. In July, employment increased by 187,000, making it 31 straight months of positive job growth. “The labor market, in particular, has been surprising, because as long as people are getting jobs and getting raises, they’re spending money. And consumer spending is 70% of GDP,” Weiler explained.