Why Our Consumption Basket Matters

In a World Business Report podcast, a Lithuanian microbrewery owner said inflation elevated his costs by 30% to 50% but he could barely raise his prices. Employing four people, his business is a family operation that produces 3,000 liters a day. One of his three beers has raspberries that local farmers supply. While he also gets his malt locally, his yeast comes from France and his hops, Germany. As a result, he is impacted by French and German inflation.

Where are we going? To how inflation hits each of us differently.

Inflation Rates

Euro Area

For the 20 countries in the euro area, inflation was an estimated 7% during April. Meanwhile, for Lithuania, a euro area nation, the rate was close 13.3%.

This map, showing March inflation, includes the 20 euro area countries:

In the euro area, not only do inflation rates vary, but their trajectories also are different. According to April estimates, Luxembourg is at the low end with a 12-month inflation rate of 2.7% while Latvia, at 15% is the high end. Meanwhile, Germany’s inflation rate is slightly down and France’s is up a bit. With the darkest shading, Hungary’s 12-month inflation rate exceeds 25% but it is not in the euro area.

U.S.

In the U.S. also, inflation depends on where you live. For March 2023, the rates range from New England’s 3.6% to the Mountain states’ 6%:

Our Bottom Line: Why Inflation Rates Differ

Ranging from higher energy prices to supply chain disruptions, the causes of inflation in the U.S. and euro area have affected all of us. But still, when the European Central Bank and the Federal Reserve both said they would hike target interest rates by a quarter point, the impact depends on where you live and who you are. It relates to our different consumption baskets.

One word to remember is transportable.

Goods and services that move from one region to another tend to have similar prices. Video games are a good example because, being available online, they tend to reflect the same inflation rate everywhere. By contrast, whatever is place specific will not. As a result, housing leads the list of causes for inflation disparities. Also though, items that are tough to move like concrete and those that are perishable like fish will vary in price. In a similar category we have services with one location. Even baseball ticket prices will be local because we pay what we are charged to see the home team. (They are not transportable.)

At this point, thinking of our consumption baskets, we can add a long list of reasons that regions differ. Climate is one cause. Where it is cold, there is more demand for heat. Culture also can affect demand. Here, we can use meat as an example, saying the elevated demand for certain kinds of foods can affect their inflation rate, Finally, labor markets could play a role. Higher wages could lead to higher prices.

You can see below that for the euro area energy played a big inflation role until recently.

So, where are we? We can return to Lithuanian beer when we think about inflation.

My sources and more: Thanks to the BBC’s World Business Report podcast report on Lithuanian inflation for inspiring today’s post. From there, Eurostat came in handy for the eureo area as did the euronews and this (rather obscure) Malta website. Then, for the U.S., Yahoo Finance and the BLS had the numbers. And finally, the St. Louis Fed was ideal for regional rate analysis.