Caramelo was partially inspired by author Sandra Cisneros's life growing up as a Latina in Chicago. This story is actually two stories in one: the first is the story of the narrator, Celaya. She begins the story by describing her large, dramatic family in Mexico City from a five-year-old's perspective, including everyone from the father she adores and the grandmother no one likes to Calendaria, the daughter of her grandmother's maid.

Later, when Celaya is a teenager, her father has a heart attack. It is then that Celaya is visited by the ghost of her "Awful Grandmother," who in life was so overly possessive of her son (Celaya's father), that she tried to destroy the family he made with Celaya's mother. This Awful Grandmother tells Celaya that if she doesn't want her to take her father away with her to the afterlife, she has to tell her story.

Celaya, of course, agrees, and so begins the second of the two stories. She tells the reader how her grandmother, Soledad, was abandoned, not just by her own parents, but by her husband as well. The latter only married her because she was pregnant with his child, Celaya's father, and he ignored her for most of their married life. Having no one else to love, Soledad channeled all of her devotion into loving her son, Inocencio.

She loved him so much and wanted so much to keep him to herself that she then officially became the Awful Grandmother, sabotaging his relationship with his wife and his family at every opporunity. This act of sabotage eventually culminated in her telling Celaya's mother, Zoila, that Calendaria, the daughter of her maid, is actually the product of an affair Inocencio had while they were married. She hopes that this will break up the family, so she can finally get her son back.

By having Celaya tell the tale of her treachery, Soledad feels she is finally able to ask for some sort of mercy or forgiveness.

Celaya's own life seems to follow this same pattern, as she eventually runs away to Mexico City with a boy named Ernesto, who ends up leaving her when he chooses his own overprotective mother over her.