Why Is My Ice-Cream Cone So Expensive? An Inflation Explainer For Teachers (And Everyone Else!)

The other day, I went with my kids to get ice cream around the corner. It was a hot, early-summer day. I won’t lie: I was just as excited as they were. We got on line, my eyes drifted up to the board with the prices, and I nearly passed out. For me and three kids, our little outing to the local ice-cream shop was about to become a very expensive proposition. Not that long ago, those same two scoops at the same place cost about half us much. What the ???

It’s Inflation

It’s not just the ice-cream cone. It’s also shampoo, notebook and pencils, backpack and new sneakers for back-to-school, the amusement park admission for that last gasp of summer, and the babysitter you pay so you and your +1 can go out for a drink before the mayhem of the school year begins anew.

In the U.S., we’re experiencing a 40-year high in inflation, and rates are similar around the globe. [Important note, educators: Inflation, which went up 8% in the first half of the year, cooled in July, as gas prices fell. Since the pandemic and especially since the war in Ukraine, the economy has been more unpredictable than usual, and economists aren’t sure where things are going. I’ll update this piece with current numbers in September, but the underlying explanation is true wherever inflation goes in the coming months.]

So what is inflation, and why is it happening?

Inflation is the decline of purchasing power, or the rise in prices across the board. What used to cost $5 now costs $8, which means that what I can buy with that $10 bill is a lot less now than it was just a few years ago. The Ten News, a cool podcast that covers the news for kids in a sophisticated but fun way, captured it like this: Inflation is an increase in price and can show up as the thing costing more or paying the same amount for less, AKA “shrinkflation.” That jug of orange juice doesn’t just look smaller – it is smaller!

To calculate the rate of inflation, we take the current price of something, subtract the former price, and divide that over the former price:

(Current Price – Former Price)/Former Price

Using our ice cream as an example, $4.00-$2.75/$4.00 means that those two scoops have gotten about 30% more expensive since 2016. Now, the rising price of ice cream in my neighborhood has clearly outpaced inflation, and isn’t the same as it, because inflation isn’t the increase in price in any one type of food or product; it’s the overall rise in the price of goods or services. Economists look at the change in prices of a fixed group of goods and services to determine inflation, but the general approach they use (the change in price over the original price) is the same. From January through July, the rate of inflation in the U.S. was about 8%.

Why is inflation so high right now?

Rising prices associated with inflation are caused in two main ways: demand-pull inflation and cost-push inflation. We’re experiencing both right now.

Demand-pull inflation is when the demand for goods or services increases, but the supply remains the same, pulling up prices. During the early days of pandemic, spending slowed, because folks lost jobs or were worried about the economy, and also because the kinds of special things we usually spend money on – restaurants, travel, hotels, movies, plays – weren’t available. On top of that, the government gave out stimulus money, to make sure people had enough for basic costs of living, like rent and food. People saved money. Add to that that supply-chain woes and a tight employment market meant that it was harder to stock stores with the stuff people wanted or to fill the service jobs on the airplanes and in the restaurants where people wanted to go. As life opened back up, lots of people had lots of money saved, and they wanted to spend it.

Peter Ganong, a professor of economics at the University of Chicago and a Faculty Research Fellow at the National Bureau of Economic Research, summarized: “The pandemic led to increased savings, in part because there were fewer opportunities to spend money. As things open up, people are excited to do things they weren’t able to do during the worst of the pandemic. People have money to spend, and they’re more willing to spend more for the same thing.” The demand for goods and services increased, and the supply couldn’t keep pace. As a general matter, in our economy, when that happens, prices go up.

At the same time, the war in Ukraine, shut-downs in China, and the same supply-chain challenges described above have led to cost-push inflation.

Cost-push inflation is when the supply of goods or services is limited in some way, while demand remains the same, pushing prices up. Russia is the world’s third-biggest oil producer and larger exporter. Ukraine is one of the world’s biggest producers of grains. The war has led to massive disruptions of both, pushing up the price of the oil (and therefore gas) and grains that everyone else is producing.

Can we do anything about it?

If all you want is an explanation of how inflation got this high, you can stop now. But economics and values are tightly interwoven, and any class on economics doesn’t do the subject justice, or take students seriously, if it doesn’t make that clear. Our economy isn’t just about invisible market forces working their silent gravity on us. We make decisions that in turn shape the way our economy impacts us. It is clear that “industries with higher inflation are earning higher profits.” It is at least possible that companies are boosting inflation by using it as an excuse to increase prices to make more profits. Just because people are willing to spend more doesn’t mean that people have to charge more.

Meanwhile, inflation isn’t necessarily a problem. As Professor Ganong explained, “At the bottom, wage growth is outstripping inflation. We’re therefore seeing increased purchasing power for many folks who are poorer.” In fact, inflation can coexist with rising living standards. In the 1960s, inflation was higher than in most of the 21st century, but the yet-faster rise in wages meant that living standards increased more than we saw in the 21st century, when both wages and prices rose slowly. The invisible hand may guide the market, but our values and choices guide the invisible hand.