Inflation is slowing. Here's why prices still aren’t going down (2024)

FAQs

Why do prices not go down when inflation goes down? ›

There's an important difference between inflation increasing more slowly — a phenomenon called disinflation — and inflation reversing itself, which would lead to prices coming down. Economists call the latter deflation, which is typically associated with a shrinking economy and potential recessions.

That's because prices, on average, are a one-way ticket, generally rising over time, and falling only when something has gone wrong with the economy. Officials at the Federal Reserve who set the nation's monetary policy are determined to keep it that way.

Many economists say the Fed's interest rate hikes starting in spring 2022 has succeeded in slowing inflation. By making it costlier to borrow, the central bank has curbed demand for goods and services, making it harder for businesses to keep raising prices.

"Expect the annual inflation rate to show a significant move towards the Fed's target of 2% to 2.5% in the early spring of 2025," said Kiplinger, assuming "monthly improvements materialize this summer."

And very unlikely. If you study the price of food it tends to increase at about 2% per year since about 2000. In 2022 food prices jumped 11.4% over the prices in 2021. The USDA is predicting that the overall food prices for 2023 are 3.6% higher than 2022.

But the reality is that even as the inflation rate slows, it's unlikely the cost of many individual items will decline. They just won't rise as fast. As much as it might not feel like it over the last few years, ever-rising prices can actually be a good thing in the broader economic picture.

It could take until 2026 to see a 'normal' real estate market. To get affordability back to a comfortable range will take a combination of higher wages, lower interest rates and stable prices, economists say, and that combination may take until 2026 or later to coalesce.

During the pandemic, prices for goods and services skyrocketed as businesses grappled with COVID-19 and the economic turmoil that came with it. By mid-2022, the overall inflation rate reached 9% — the highest in a generation. While inflation is slowing down and nearing normal levels, prices remain high.

But as consumers emerged from lockdowns with massive pent-up demand at the same time as global supply shortages, energy was driving about a third (32 percent) of inflation, while food prices were driving 15 percent of inflation. The changing drivers of inflation have evolved as much as the U.S. economy.

About 1 in 5 economists (or 20 percent) see inflation sinking to 2 percent by the end of 2024, while another 20 percent see elevated inflation lingering until the end of 2026 or later.

Who will lose from inflation? ›

This is inflation's primary and most pervasive effect. An overall rise in prices over time reduces the purchasing power of consumers because a fixed amount of money will afford progressively less consumption. Consumers lose purchasing power regardless of whether the inflation rate is 2% or 4%.

WASHINGTON — The inflation-adjusted median income of U.S. households rebounded last year to roughly its 2019 level, overcoming the biggest price spike in four decades to restore most Americans' purchasing power. The proportion of Americans living in poverty also fell slightly last year, to 11.1%, from 11.5% in 2022.

'A huge shift in demand'

Prices for “core” goods — commodities excluding those related to food and energy — have deflated by about 2% since August 2023, on average, according to CPI data. They fell 0.2% during the month, from July to August 2024.

Typically, deflation is a sign of a weakening economy. Economists fear deflation because falling prices lead to lower consumer spending, which is a major component of economic growth. Companies respond to falling prices by slowing down their production, which leads to layoffs and salary reductions.

Inflation occurs when prices increase over time. This means that if you save $100 today, you'll only have $104 tomorrow. That's because the value of each dollar has decreased due to the rising cost of living. If there was no inflation at all, it would mean that prices would stay the same for an extended period of time.

Rising costs and uncertain revenue growth can take a toll on corporate profit margins, and stock prices can fall in response. On a broader scale, high inflation creates unknowns about future interest rates. That uncertainty often contributes to market volatility.

Typically, deflation is a sign of a weakening economy. Economists fear deflation because falling prices lead to lower consumer spending, which is a major component of economic growth. Companies respond to falling prices by slowing down their production, which leads to layoffs and salary reductions.

Long-lasting episodes of high inflation are often the result of lax monetary policy. If the money supply grows too big relative to the size of an economy, the unit value of the currency diminishes; in other words, its purchasing power falls and prices rise.