Why Coffee Inflation Is Different
Globally, breakfast is more expensive:
However, in an inflationary world, coffee could be unique.
Since February, the end date for the following graph, coffee prices slipped slightly. But still, they are way up. The reasons relate to the pandemic and the weather. Typical of Covid, we had shipping delays. Everywhere-from transport to energy and labor to packaging, there were supply chain disruptions. Then also, Brazil’s coffee growers were slammed by a drought and a frost:
Usually, price increases diminish how much we are willing and able to buy. Coffee though is different. According to Euromonitor, our morning cup of coffee is a part if our daily routine. Culturally, because of the caffeine, and perhaps because it is affordable, coffee would be tough for you and me (I am a committed coffee drinker) to sacrifice.
We could say that our demand for coffee is inelastic.
Our Bottom Line: Inelastic Demand
Economists gauge our response to inflation with a look at our elasticity. Rather like a rubber band, when price changes, so too will the quantity we demand. If we have a massive response, then our price elasticity of demand is elastic while a small reaction is called inelastic. Doing the math, we create a fraction comparing the percent quantity (numerator) and percent price changes (denominator). As a result, a higher ratio signals we were more elastic.
Sometimes we can predict elasticity. Items with more substitutes tend to have more elastic demand. After all, if Nike sneakers become too expensive, we can switch to Adidas. Meanwhile, we tend toward inelasticity for necessities and inexpensive things.
Calculating coffee elasticities, the people at Euromonitor quantified coffee as inelastic at .26. (We can ignore their minus sign.) As they explained, a 1 percent price increase will bring volume down .26 from previous growth projections. For Ready To Drink coffee, our buying behavior is much more elastic:
Returning to breakfast, we can ask how our elastic tendencies will change what we eat. Maybe less bacon?
Originally published at https://econlife.com on June 9, 2022.