Q&A: If Inflation is Improving, Why Are Prices Still So High?

Q: I’ve heard that inflation is finally slowing down, but I’m finding that prices are still shockingly high on just about everything. Why are prices still so inflated, and when can we expect them to finally start dropping?

A: After hitting a 40-year high, inflation, marked by periods when the U.S. dollar loses value, is indeed cooling off. However, the prices you’ll encounter with brick-and-mortar and online retailers tell a different story. There are several factors driving the stubbornly high prices and important information to know about the way inflation works. Let’s take a closer look at the inflation rate, the high prices on many goods and what you can expect to see in the coming months. 

How is inflation measured?

Many people assume the inflation rate is a direct reflection of the prices on goods. In reality, though, the U.S. inflation rate is the percentage at which a select group of 80,000 foods and services purchased in the U.S. increases in price over the course of a year. These goods and services are tracked in the Consumer Price Index (CPI). Since the inflation rate only measures how much the prices of the items in the CPI rose over a year, the rate can be decreasing even as some goods boast high prices. Also, the CPI is a broad measure and does not account for every single product and service. Consequently, it is not a perfect indicator of inflation or prices in general.

The U.S. inflation rate in July 2023 was 3.18% compared to 2.97% in May 2023, and 8.52% in July 2022. So, while prices may still be high, overall, they are improving.

Why are prices still so high?

In an effort to keep runaway inflation in check, the Federal Reserve has raised its interest rate numerous times since the pandemic. When this happens, banks and lenders are forced to raise their rates as well. This makes it more expensive for consumers to take out large loans and utilize their lines of credit. The hope is that this will trigger a decrease in consumer spending, which will push businesses to lower their prices, or, at the very least, resist raising prices further. 

Unfortunately, though, this did not quite play out as planned. Some sectors, such as the real estate industry, which is strongly affected by rising rates, have cooled off significantly and prices have dropped as anticipated. Other parts of the economy, though, such as the service sector, were not impacted by rising interest rates. Demand for services, which practically halted during the pandemic, is still strong and consumers are willing to pay the high prices that service providers continue to charge. And those prices show no signs of dropping anytime soon. 

In addition, there are still several commodities selling at stubbornly high prices due to the lingering impact of the pandemic, as well as other unrelated factors. These include:

Used cars. At first, demand for used cars outpaced supply due to pandemic concerns that had people avoiding public transportation. More recently, though, the limited supply is due to a massive worldwide shortage of microchips and replacement parts. All of this naturally drives prices up.

Eggs. Eggs sold at record prices last spring when bird flu killed and infected thousands of egg-laying hens. The price has since dropped, but is still not back at pre-pandemic levels. 

Cereal and baked goods. Just as food prices were starting to recover from supply chain chokeholds in 2022, the war in Ukraine, a country that is a major exporter of grain, drove them back up again.

Fuel. Gas prices also peaked last year due to the war in Ukraine. They’ve since fallen, but have not gone back to pre-pandemic levels.

Insurance. Premium rates on home and auto insurance have risen significantly, and they aren’t falling anytime soon. Labor shortages, which makes repairs on cars and homes more expensive, as well as a dearth in supply of cars and homes, makes coverage more expensive for the insurance companies. This cost is then passed on to the consumer. 

Rent. The housing market is still suffering from a thin supply as new construction races to catch up with the post-pandemic demand, which is largely driven by the mass exodus from big cities. 

There are several more examples like these that continue selling at high prices for similar reasons. So, while inflation as a whole may be improving, the average consumer is still feeling the pinch in their wallets in a big way. 

When will prices start dropping?   

Cash-strapped Americans waiting for groceries to become affordable again may have a long wait ahead. 

It’s important to note, though, that a dramatic decrease in prices would actually be harmful for the economy. When prices plunge, consumers tend to hold off on large purchases as they wait for prices to fall further. At the same time, businesses spend less as they pull in less revenue. These dual factors can lead to a recession, or worse, a depression. 

The good news is that prices are beginning to drop and inflation has already shown signs of cooling. The Fed has also pledged to raise interest rates again in an effort to continue curbing inflation. While no one can promise that prices will ever go back to pre-pandemic levels, it does seem as if we’ve gotten past the peak of post-pandemic inflation and are heading toward an economic recovery.