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If Inflation Is Improving, Why Are Prices Still So High?

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shocked man looking at grocery bill, inflation

Q: I’ve heard that inflation rates are improving, but prices are still 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 is indeed cooling off. But, the prices you’ll encounter, whether in person or online, tell a different story. Here’s why.

How is inflation measured?

The U.S. inflation rate is the percentage by which a select group of 80,000 foods and services purchased in the U.S. increase in price over a year. The inflation rate only measures how much the prices of these items rise over a year. This means the rate can decrease even as some goods continue to boast high prices.

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, they are improving overall.

Why are prices still so high?

In an effort to keep runaway inflation in check, the Federal Reserve has raised its interest rate many times since the pandemic. This forces lenders to raise their rates as well, making it more expensive for consumers to take out large loans and use lines of credit. The hope is that this will trigger a decrease in consumer spending, which will then push businesses to lower their prices or resist raising them further.

Unfortunately, though, some parts of the economy, such as the service sector, are not being impacted by rising interest rates. Demand for services is still strong, and consumers are willing to pay the high price that service providers continue charging.

In addition, there are still several commodities selling at high prices due to the lingering impact of the pandemic and other unrelated factors. For example, used cars are expensive at the moment due to a massive shortage of microchips and replacement parts. Meanwhile, eggs have still not completely recovered from the bird flu scare of last spring. Prices of baked goods and fuel are currently high thanks to the war in Ukraine, and auto and home insurance premiums are increasing due to labor and supply shortages. So, while inflation may be generally improving, the average consumer is still feeling the pinch.

When will prices start dropping?

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

The good news is that prices are beginning to drop, and inflation has already shown signs of cooling. While no one can promise that prices will ever go back to 2019 levels, it does seem as if we’ve seen the worst of post-pandemic inflation and are heading toward a recovery.

In short, even though the business headlines and your grocery bill may not seem to be living in the same reality, there’s hope on the horizon.

If you enjoyed this article, consider checking out the rest of our MoneySmart Tips blog.

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