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Why Everything Still Feels So Expensive
Recently, the broad consensus has been that inflation is under control again. Even in light of this week’s reading, the data appears clear: Inflation is mostly back under control with the most recent headline inflation reading coming in at 3.1%.[1]
It may surprise you that the current reading is actually below the long-term average from 1960-2022, which was about 3.8% per year.[2]
If inflation is, in fact, back under control, why does everything still feel so expensive? This is the general question we have heard from numerous people recently, so we thought we might offer a few thoughts on it today.
Let’s first address the question head-on: Simply stated, the reason everything still feels so expensive is because everything still is expensive. Yes, inflation has come down, but that doesn’t mean prices have fallen. On the contrary, prices remain high; they’re just now rising at a more historically-normal rate
As a simple example, a box of cereal that was priced at $4/box might now be $6/box. The fact that inflation has slowed doesn’t mean that same box of cereal will ever be $4 again. That would be deflation, which seems unlikely for most of the things we buy. It’s unfortunate but true.
What’s making these new prices even more difficult to digest is that, for the past couple of decades, we’ve grown accustomed to prices increasing by cents (which was hardly noticeable) while recently, prices have risen by dollars. That’s very noticeable and we feel it in our wallets.
There are other factors in play here as well. For instance, within industries where commodity prices have fallen, once consumers become accustomed to higher prices, companies aren’t likely to drop their prices to previous levels just because their input costs have decreased. Instead, companies may attempt to use this pricing disparity to book temporarily higher profits.
Obviously, that’s bad for consumers but good for the companies. It’s probably also good for the people who work for said companies as they earn higher wages. On net, is that good or bad? It depends on which side of the ledger you’re on. The point is, it’s complicated.
Beyond those situations, there are service-based goods that have their own unique inflationary pricing issues. As one example, in economic areas where “tipping” was once considered an additional kindness, it’s become an expectation causing prices that were already high to feel even higher.
We’re not debating the merits of that issue, just that it’s now part of the cost structure that makes things that were already expensive feel even more so.
There are a few areas in which prices do decline over time, such as technology. But we tend to view those as optional luxuries, while grocery store prices make us feel like we’re being raked over the coals, encouraging us to place the blame for this issue at somebody’s feet. Maybe rightfully so. But maybe not.
If the ’70s and ’80s are our roadmap for the future, we shouldn’t expect prices to revert to pre-COVID levels. If they do, we may have other problems since deflation isn’t necessarily good either.
Thus, we think the best we can hope for is that prices remain stable from here, thereby avoiding a second wave of inflation that would mirror the experience of the ’80s. While that may not be what anyone wants to hear, that’s probably the best-case scenario.
If we have provoked additional questions, please be encouraged to reach out anytime. As always, stay the course.
[1] Bureau of Labor Statistics
[2] World Data