Why Is Everything So Expensive?

If you've gone out with your friends recently, you've probably noticed how quickly your money disappears. An order of spicy fusilli and a drink somehow costs thirty dollars. Going to a movie theater feels like highway robbery. Don’t even get me started on gas prices. And if you've ever looked up home prices in Los Angeles out of curiosity, you've probably wondered how anyone our age is ever supposed to afford one. It feels like everything has gotten expensive.

People naturally want someone to blame. Is it greedy corporations, politicians, or the Federal Reserve? Inflation maybe? While each of those explanations contains a small piece of the truth, none of them tells the whole story. The reality is that housing, groceries, gasoline, college tuition, and even your lunch have all become more expensive for different reasons. Understanding those reasons will not make paying for them any easier, but it does make it easier to understand why solving the problem is so difficult.

Inflation Isn't Actually the Enemy

When most people hear the word inflation, they assume it's something bad that we are trying our best to eliminate. Interestingly enough, that's not true. The Federal Reserve, America's central bank, actually aims for inflation of around 2% every year. That sounds completely backwards, right? If inflation makes things more expensive, why would anyone intentionally want it? Well, a small amount of inflation actually helps keep an economy healthy. Imagine Apple announced that next year's iPhone would cost $800 instead of $1,000. A lot of people would probably wait. Now imagine everyone started thinking that way about cars, clothes, computers, and even houses. The customers would delay purchases, businesses would sell fewer products, companies would hire fewer workers, and eventually the economy would slow down. Economists call this deflation, and while lower prices might sound great, long periods of falling prices can actually be pretty harmful.

A little inflation encourages people to spend and invest now rather than constantly waiting for better deals. It also gives businesses room to gradually increase wages and expand over time. In other words, inflation itself isn't necessarily a problem. In moderation, it's actually part of how the economy is designed to function. The inflation we experienced after COVID, however, was far from normal. The government injected trillions of dollars into the economy while interest rates were near historic lows. At the exact same time, factories shut down, shipping containers piled up at ports, and supply chains across the world couldn’t keep up. People had money to spend, but businesses couldn't produce enough goods fast enough. Basic economics dictates that if demand rises while supply stays limited, prices increase.

Today, inflation has slowed significantly since then, but lower inflation does not mean prices go back down. It simply means they're increasing more slowly than they were before.

Why Is California So Much More Expensive?

Inflation explains why prices have risen across the country, but it doesn't explain why living in California feels like constant robbery compared to other states.

The biggest reason is surprisingly simple: lots of people want to live here, and we haven't built enough housing for all of them. California has great weather, beaches, mountains, major universities, some of the largest tech companies in the world, and an entertainment industry that attracts people from every corner of the globe. Millions of people want to move here every year, but new housing hasn't kept up with that demand. Strict zoning laws, long approval processes, environmental regulations, and neighborhood opposition to new developments have all made it difficult to build enough homes. Again, we can see that demand continues growing but supply struggles to keep up, so prices rise. 

Higher wages also contribute. Due to a higher minimum wage, businesses in California have to pay employees more than businesses in many other states for the most part, but those higher labor costs eventually work their way into the prices consumers pay. Restaurants, retail stores, construction companies, and nearly every other business have higher operating costs here than they would somewhere like Texas or Tennessee.

So Why Is Gas $6 a Gallon?

Whenever gas prices spike, people often assume oil companies are simply charging more because they can. While greedy oil execs certainly play a role, California has several unique aspects that make gas consistently more expensive than in most other states. For one, California has some of the highest gasoline taxes in the country. The state also requires a cleaner-burning gasoline blend that helps reduce air pollution but costs more to produce. On top of that, only a limited number of refineries are equipped to produce this specialized fuel. If even one refinery has maintenance issues or unexpectedly shuts down, supply drops quickly, and prices can jump almost overnight. Global oil prices matter too. If geopolitical tensions disrupt oil production somewhere in the world– for example, if the United States were to blockade a strait of water that 20% of the world’s oil flows through, cutting off a large supply of crude oil – Californians often feel the effects almost immediately. As you can see, there isn't one reason gas is expensive. It's the result of taxes, environmental priorities, refinery capacity, transportation costs, and global energy markets all interacting at the same time.

Are Your Instagram Reels About Corporate Greed Right?

Every time prices rise, one explanation seems to dominate social media: corporate greed. It's an understandable argument: if companies are charging more, doesn't that simply mean they're being greedy and only caring about their own profits? The problem is that companies have always wanted to maximize profits. Starbucks didn't suddenly decide it wanted to make money in 2022. Chipotle wasn't operating as a charity in 2018. Businesses have always tried to charge the highest price consumers are willing to pay. The conditions around the companies are what change. When demand is extremely strong and supply is limited, businesses often discover they can raise prices without losing many customers. In industries where competition is limited, the dominant companies may have even more pricing power. Some businesses undoubtedly used inflation as an opportunity to raise prices more than necessary, but that alone doesn't explain why prices increased across nearly every part of the economy at roughly the same time. Greed may influence how individual companies set prices, but it isn't enough to explain nationwide inflation by itself.

Will Things Ever Be Affordable Again?

The real question everyone wants answered. I’ll give the good news first and the worse news after.

The good news is that wages usually rise over time. As workers become more productive and businesses grow, incomes generally increase as well. Historically, living standards have continued improving despite periods of inflation. The bad news is that you're probably never going to see most prices go back to where they were five or ten years ago. If you're hoping your favorite lunch spot suddenly starts charging 2019 prices again, or that houses in Los Angeles become half as expensive overnight, you're probably going to be disappointed. That's just not how inflation usually works. Affordability improves when incomes rise faster than prices do, and it doesn’t look like that is going to happen any time in the near future. 

The reality is that there isn't one person, company, or politician responsible for making life more expensive. Millions of individual decisions interact every day to determine the prices we pay. The next time you look at the price of your coffee and wonder how it possibly costs that much, remember that you're seeing the result of countless economic forces working behind the scenes. Understanding those forces won't make your burrito any cheaper, but it will help explain why solving the problem is far more complicated than writing mean posts to politicians and telling prices to come back down.