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Financial Fact - Inflation Is Down, So Why Are Prices Still High?

Inflation is down to 3.7 percent as of August 2023, after topping 9 percent in 2022. Nonetheless, consumers continue to grapple with the consequences of soaring prices in their daily lives, since the cost of some goods and services remains stubbornly high. The average American is not experiencing immediate relief despite a decrease in the inflation rate.

 

 

The American economy has been navigating through choppy waters, with a confluence of events creating a perfect storm for consumers. On one hand, the Federal Reserve has been increasing interest rates to combat inflation. Inflation is down to 3.7 percent as of August 2023, after topping 9 percent in 2022.(1) Nonetheless, consumers continue to grapple with the consequences of soaring prices in their daily lives, since the cost of some goods and services remains stubbornly high. The average American is not experiencing immediate relief despite a decrease in the inflation rate.

Why does it seem like there is a disconnect between what the economic statistics tell us and what the average consumer feels? The Consumer Price Index (CPI) measures the monthly change in prices paid based on a weighted average of the cost for a basket of goods and services representing aggregate U.S. consumer spending. Which goods and services have been driving the high inflation have varied over time. Earlier on, supply chain disruptions and the Russia/Ukraine war caused prices for goods, food and energy to surge. Although prices for these categories have moderated since, inflation has remained elevated because of higher costs for services (think of airfare and restaurants) reflecting a change in spending patterns by consumers. Housing costs are part of the CPI calculation, but a lag effect exists in housing prices which could add to the confusion. Also, food and energy prices tend to be unstable and are subject to wild swings. As a result, officials at the Federal Reserve will look at different calculations and avoid putting too much weight on one metric.

The timeline for when people may experience alleviation from high prices following a decrease in inflation can vary and depends on a variety of factors. While there is a drop in the inflation rate, it does not necessarily mean an immediate return to pre-pandemic price levels. Some of the factors that determine the extent and duration of relief include supply chain dynamics, labor market conditions and government policies. Here's a closer look at those factors.

  1. Supply Chain Dynamics: Supply chain disruptions were a significant factor driving inflation during and after the pandemic. As global supply chains recover, the pressure on prices has eased.
  2. Government Policies: Government policies, such as fiscal stimulus measures and monetary policy decisions (e.g., interest rate changes by central banks), play a crucial role in influencing inflation. While the Federal Reserve has been trying to rein in inflation by raising interest rates, stimulus checks and government spending have the opposite effect.(1)
  3. Labor Market Conditions: Wage pressures can also influence the inflation outlook. When wages rise significantly, it gives consumers better purchasing power, but it can also put upward pressure on prices as businesses pass on increased labor costs to consumers. Conversely, stagnant wage growth may mitigate inflationary pressures.(2)
  4. Commodity Pricing: The prices of commodities like oil, metals, and agricultural products can fluctuate more than other categories. A decrease in commodity prices can contribute to lower consumer prices.(3)

While a decrease in the inflation rate is a positive sign, the specific period of time when consumers feel relief can differ from one region or country to another and may vary across different sectors of the economy. What’s most important is that as supply chain dynamics, economic conditions and commodity prices move in a more favorable direction eventually costs will decrease and with patience, Americans’ financial burdens may lighten.

 

  1. Inflation is slowing down, so what’s keeping prices high? Here’s what experts say (yahoo.com)
  2. Inflation Is Still High. What’s Driving It Has Changed. - The New York Times (nytimes.com)
  3. Inflation Is Slowing But Prices Are Still High: Here's Why | Bankrate

 

 

 

 

 

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