Why Are Prices Still High If Inflation Is Down?
By Michael A. Scarpati, CRPC® | Co-Founder & CEO
In the face of declining inflation rates, a situation has emerged that defies the expectations of many. Inflation has decreased, yet the cost for goods and services have stubbornly stayed high. So, what gives?
This article will simplify the complexities behind persistent high prices, explain how inflation works, what drives it, and provide you with practical tools to navigate the future. Let's dive in.
What Is Inflation?
Inflation measures the uptick in prices over time, and is tracked by the Consumer Price Index (CPI). It represents the average price change for a basket of goods and services over time. This metric doesn't translate directly to price tags for individual items, leading to a disconnect between broad economic indicators and the prices we encounter daily. It is a broad indicator of price changes across all goods and services over a given period of time.
Source: Current US Inflation Rates: 2000-2024 (usinflationcalculator.com)
The inflationary surge of 2021 & 2022 reached heights that we have not seen in close to 40 years. Yet, even as 2024's data suggests inflation is cooling down, the anticipated relief at the checkout counter is non-existent. It may seem strange, but this actually make a ton of sense. Let's review how it all works.
Why Are Things Still So Expensive?
The massive inflation spike of 2021 and 2022 created an enormous issue for prices. This is because inflation has a COMPOUNDING EFFECT, meaning the current inflation rate always builds on last year’s price increases. Once the damage is done, prices will only continue to rise.
To put it simply. Prices will not be going down as long as we have ANY level of inflation.
For prices to decrease, we would need to experience deflation, which has only happen one time in the last 80+ years. Lower levels of inflation just mean that prices are still increasing, just at a slower rate than last year.
What Happened?
Normal Inflation:
From 2000 to 2021 (average inflation rate of 2.2%)
- $100 worth of groceries would have risen to approximately $157.9
This is a $57.93 increase over the course of 22 years
The Impact of High Inflation:
From 2021 to 2024 (average inflation rate of 4.85%)
- 5.4% in 2021
- 8% in 2022
- 3% for both 2023 and 2024
The 2021 cost of $157.93 will increase to about $190.87 by end 2024.
This creates a $32.94 increase in just 4 years
This stark contrast between the two periods show how recent inflation spikes had a much more profound effect on our purchasing power, especially compared to the previous two decades of more stable inflation.
What Is Causing Inflation?
Several factors contribute to the persistence of high prices even as inflation rates slow down. Here are 4 factors that cause inflation.
Supply Chain Disruptions:
The global economy is still grappling with the aftermath of supply chain disruptions caused by the COVID-19 pandemic. These disruptions have led to shortages of raw materials, increased transportation costs, and logistical challenges, all of which can contribute to higher prices for consumers.
Wage Pressures:
In response to rising inflation, workers may demand higher wages to maintain their purchasing power. Employers, facing higher labor costs, may then pass these costs onto consumers in the form of higher prices.
Pricing Power:
Some companies may take advantage of strong demand or reduced competition to maintain higher prices, even as inflationary pressures ease. Brand loyalty, perceived quality, and market dominance can all give companies the pricing power to resist downward pressure on prices.
Government Policies:
Monetary and fiscal policies can also influence the trajectory of inflation. Central banks may keep interest rates low to stimulate economic growth, but this can also contribute to inflationary pressures if not carefully managed. Similarly, government spending programs can inject additional money into the economy, potentially fueling inflation.
How Do I Protect Against Inflation?
- Invest Wisely: Account for the rate of inflation when investment planning to maintain or enhance your purchasing power.
- Stress Test Portfolio: Inflation may require additional draw from your existing investments. Make sure you understand your portfolio downside in case you need to rely on them.
- Save Systematically: Regular savings can benefit from compound growth, building a buffer against inflation.
- Spend Smarter: Create a budget to track spending.
- Financial Habits: Conscious spending and saving habits are foundational to long-term financial stability.
How To Plan For Financial Stabilty
The increased inflation rates of recent years will significantly impact the savings required for retirement and future healthcare expenses. As costs rise, it's essential to reassess your financial plan to ensure it can withstand the test of time.
- Complete A Financial Checkpoint: Gain clarity on your financial health with our complimentary Financial Checkpoint. This 4-minute quiz will evaluate your retirement progress and identify any immediate risks or concerns.
- Plan with a CFP®: Take control of your financial future with RetireUS. For less than $40/month, you can work with a CERTIFIED FINANCIAL PLANNER™ to quantify your financial goals and craft a comprehensive strategy for financial freedom.
The persistence of high prices despite slowing inflation rates underscores the complex interplay of economic forces at play. While policymakers and central bankers work to address inflationary pressures, consumers must adapt their financial strategies to navigate the challenges of a high-price environment effectively.
By staying informed, budgeting wisely, and seeking out opportunities for investment and advocacy, individuals can protect their financial well-being in an inflationary world. Want to learn more about how your current financial situation may be impacted by high levels of inflation? Book a free 20-minute consultation with an independent financial professional and review your Current Financial Situation for free.
This article is provided by McAdam LLC dba RetireUS for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this article is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in this report is derived from sources that McAdam believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. This article is the sole opinion of this individual and is not indicative of the firm’s belief.
