Why Everything Still Feels Expensive Even As Inflation Cools

Inflation has been brutal over the past few years. After decades of running below 3%, in early 2021, inflation increased rapidly as the economy began opening back up after the COVID-19 lockdowns. It peaked at 9.1% in June 2022 and has declined to its current level of 3.2%. While a 3.2% inflation rate is unquestionably better than it’s been since early 2021, it is still materially above the Federal Reserve’s 2% inflation target.

Even though inflation has cooled dramatically, when I went to the grocery store this weekend to pick up a few items, I was surprised at how much my few bags of groceries cost. If inflation has been declining, why does everything still seem so expensive?

The Difference Between High Prices and Inflation

The first reason prices seem high even though inflation is coming down is that there’s a difference between inflation and a high price level.

According to the International Monetary Fund, “inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year.” For example, if a container of almond milk rises from $3.99 to $4.49 over twelve months, it has an inflation rate of 12.5% ($0.50 ÷ $3.99). Now, almond milk is more expensive and likely to stay that way because the prices of most goods are sticky (once they increase, they usually don’t come back down). So, even if almond milk inflation goes to zero, when you go to the grocery store, you may think, “Dang! $4.49 for almond milk? That’s expensive – I remember when it was $3.99.”

As inflation continues normalizing, the “sticker shock” you experience on certain items should ease. However, the higher price level during the inflationary run-up is likely here to stay for most goods and services.

Personal Inflation Rates Differ

Next, inflation might feel higher than reported because the mix of goods and services you consume might be things that have experienced higher inflation.

Inflation is typically reported as a single number. For example, the 9.1% inflation rate mentioned above is for the “Consumer Price Index—All Items,” which, according to the Bureau of Labor Statistics, “represents changes in prices of all goods and services purchased for consumption by urban households.” The CPI—All Items is comprised of sub-categories, including education, rent, food, energy, and others. Below is a chart from the Federal Reserve showing inflation rates from 2000 to 2022 for select sub-categories.

You can see that some categories, like education and medical expenses, have significantly outpaced total inflation, while others, such as apparel and communications, have gotten cheaper. This means the inflation you experience will depend on your mix

of goods and services consumed. If you pay your child’s tuition, you’ll feel the sting of education inflation. If you own a house with a fixed mortgage payment, you won’t experience the inflationary effects of rent increases. If you have a short work commute, increases in gas prices won’t affect you as much as someone with a long commute.

The Focusing Effect

As noted in the prior section, some things we buy have experienced high inflation, and others have low inflation (or even disinflation). But it’s human nature for us to focus on negative things, which in the inflation context means high inflationary items.

For example, when it takes $40 to fill your gas tank after it recently cost $30, you notice that change. But when you buy a new dishwasher for not much more than what you purchased your prior one ten years ago (and the new one uses less energy and is twice as quiet), or when your new MacBook Pro costs less than you paid for your old one (and has twice the memory and eight times the processing power), that lack of inflation probably doesn’t register. Yet, these lower inflation items are elements of the measurement of inflation and pull down the overall rate.

Adopt a Complete Mindset Concerning Inflation

Inflation isn’t pleasant – it stinks when we must pay more of our hard-earned money for the usual goods and services we consume. Despite the overall downward trend in inflation from its peak in mid-2022, consumers continue to feel the pinch at the checkout. Yet, few of us have an accurate handle on exactly how inflation is affecting us. Recognizing that your personal inflation reality may differ from the headlined numbers can help provide perspective as the economy transitions to a, hopefully, more stable trend of low inflation.