Inflation is slowing down, so what’s keeping prices high? Here’s what experts say

After a tumultuous few years, there might be a light at the end of the inflation tunnel.

Consumer prices increased just 3.7% in the 12-month period ending in August, according to the Bureau of Labor Statistics’ latest data, released Sept. 13. Between July and August, prices climbed only 0.4%.

That’s welcome relief after record-breaking inflation followed the COVID-19 pandemic. This time last year, for example, inflation was still running hot: In the 12-month period ending in August 2022, prices climbed a whopping 8.3%.

But as inflation has cooled, prices have yet to return to their pre-pandemic levels.

Take coffee, for example.

In January 2020, ground roast coffee was about $4.17 per pound, according to BLS data. In July 2022, when inflation was near its highest, this price jumped to about $6.11. Now, even though inflation has dropped a considerable amount, coffee is about $6.09 per pound, which is still significantly higher than 2019.

So, why are prices still so high? And will they ever come down?

Here’s what to know.

Disinflation isn’t the same as deflation

One of the Federal Reserve’s main jobs is regulating the rate of inflation, keeping it at or as close as possible to the target rate of 2%. Since March 2022, the Fed has been raising interest rates as a means to reach that target.

The Fed is attempting disinflation, which is a decrease in the rate of inflation. This is different than deflation, which is a decrease in actual prices of goods and services.

While disinflation can feel painful, its outcome is typically beneficial for the economy. Deflation, on the other hand, can be harmful for the economy, according to experts.

When prices fall, some experts argue that it can create a deflationary loop: Because prices are lower, consumers wait to make their purchases, decreasing demand. This in turn can cause a decrease in profits, an increase in unemployment and a decrease in wages, ultimately limiting purchasing power and forcing demand even lower.

If prices in the U.S. were to fall, it could actually be “scary,” Dean Baker, co-founder and senior economist at the Center for Economic and Policy Research, told McClatchy News.

“Deflation is rare, and you see it when you have a very weak economy,” Baker said. “So what do we think would cause deflation? Well, if we saw the unemployment rate get up to 8, 9, 10% or something. Other than that, we’re not gonna see (deflation.) So what we’re talking about is really low inflation is kind of the good story.”

Prices still haven’t fallen to their pre-pandemic levels

Although inflation is moving in the right direction, consumers are feeling squeezed by still-high prices in some areas, including groceries.

Data from the BLS shows that average grocery store prices are mostly unchanged over the past six months despite slowdowns in inflation. This plateau comes after sharp increases during the pandemic, according to a post on X, formerly known as Twitter, from Justin Wolfers, senior fellow at the Brookings Institute and Peterson Institute of Economics.

Experts pointed out that while this data is promising for the economy, consumers are still feeling the pocketbook pressure. Indeed, food prices in particular are volatile and subject to irregular price changes, but some economists said they still expected to see a price drop after pandemic-era highs.

“Food commodity prices are volatile but tend to revert to trend, i.e. large increases are followed by decreases,” Greg Ip, chief economics commentator for The Wall Street Journal wrote on X. “So a lot of folks (incl me) who saw prices go up 15-20% thought they’d go down, at least partially.”

Will prices ever come back down?

The short answer: yes, but not to pre-pandemic levels.

Already, huge price swings, especially in categories like food and energy, have normalized, according to Baker.

“Along the items where people saw real big increases, and again, these are overwhelmingly food and energy, the prices have come back down. Not necessarily to where they were before the pandemic, but they did fall considerably,” Baker said.

The other pieces of the equation are wages and production costs.

Average hourly earnings are up about 18% since before the pandemic, according to BLS data. And while that increase has given people more purchasing power to combat inflation, it has also driven up production costs, which are reflected in retail prices.

Unsurprisingly, bringing prices back down is another part of the economic recovery equation that is reliant on slow-moving change, which takes us back to the Fed.

In the meantime, though, consumers shouldn’t be too worried, as wage increases have outpaced enough costs to at least soften high prices, according to Baker.

“Food prices, for example, those have outpaced wages, but again, over time food prices have fallen relative to wages,” he said. “If their wages have outpaced other prices and (are a) little bit behind food, then it’s in general not gonna be a big deal.”

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