Inflation is coming down, but prices won’t
Matt Kliegman had been avoiding raising prices at Black Seed Bagels in New York City for years.
“You kind of hold on as long as you can,” said Kliegman, who finally raised prices 50 cents to $1 over the last few years as inflation surged. “And that came for many of us in this kind of period after COVID.”
Now, the economy is in a different place. The Federal Reserve’s interest rate cut signaled a turning point in this multi-year battle with inflation, and inflation continues to fall. That’s good news for consumers, but it’s also created some confusion as to why prices aren’t coming down along with interest rates.
To explain, let’s break down what goes into the cost of a bagel at Black Seed Bagels, which sells for around $2:
- Ingredients: 40 cents
- Rent: 20 cents
- Repairs and maintenance: 10 cents
- Napkins and other paper products: 10 cents
- Utilities, marketing, insurance: 40 cents
- Labor: 50 cents
After all that, Kliegman makes a profit of about 30 cents.
Notice that the biggest cost is labor: taking an order, making the dough and spreading the cream cheese. The starting wage for Kliegman’s workers is about $16.75. To lower labor costs, he’d have to ask his workers to take a pay cut.
Would you be willing to take a pay cut so New Yorkers can eat cheaper bagels?
“Most people would say no,” said Ricardo Marto, an economist at the Federal Reserve Bank of St. Louis, or they might find a job at another bagel shop.
And if people aren’t willing to take a pay cut, “some of these things will be reflected in the final price that consumers pay,” said Marto.
But labor isn’t just baked into the cost of making bagels. It’s part of the cost of, say, getting a mixer repaired and ingredients delivered. It goes into the ingredients themselves.
One input price that does fluctuate both up and down is commodities like flour and salt.
“But those are such small parts of the input into making a bagel that it’s just really hard for those costs to have a lot of effect on the total cost,” said Julie Smith, an economist at Lafayette College.
Plus, the commodity prices fluctuate so often that it doesn’t make sense for Kliegman to raise and lower his prices alongside them every month.
In the end, Kliegman thinks customers get that inflation has affected business owners, too.
“[But] I think there’s still kind of an adjustment that’s happening,” he said.
It’s just easy to forget when you’re standing at the counter, deciding whether you get a $2 bagel with butter or spring for a $9.95 bacon, egg and cheese.