Why prices remain high even when inflation subsides
Personal finance reporter Daniel de Visse explains why cooling inflation still means rising prices, and why cumulative inflation continues to drive up costs.
Consumers learned this week that inflation “cooled down” in June, due in part to lower gas prices.
However, prices still rose. In fact, June’s annual inflation rate of 3.5% was higher than the inflation rate for any month in 2025.
Inflation is complex. Prices can go down in the month, like June, but they can go up over the year. A fall in inflation does not necessarily equate to a fall in prices. And what consumers care most about is the price they are currently paying at the supermarket.
“Our direct, personal experience with prices is not necessarily reflected in national inflation statistics,” said Elizabeth Renter, senior economist at NerdWallet.
Here are answers to all the questions about inflation you’ve been afraid to ask.
Is inflation rising or falling?
That’s a difficult question.
Prices rose 3.5% in the year to June. A month earlier, in May, the annual inflation rate was 4.2%. In other words, from May to June, the annual inflation rate declined.
In that sense, the annual inflation rate has been declining.
What about the price?
Despite the decline in inflation in June, prices were still 3.5% higher than in the same month last year.
Prices are almost always rising. Annual inflation rates over the past five years have ranged from a low of 2.3% to a high of 9.1%.
Prices often drop from month to month. For example, consumer prices fell by 0.4% in June.
However, prices usually increase from year to year. An increase of just 1% or 2% in a year may not be noticed by consumers. If prices rise too quickly, shoppers will suffer.
“Slow and steady price increases are normal,” Renter said. “The pain is especially acute when inflation is higher than normal.”
Why are prices still so high even though inflation is falling?
Just because the inflation rate is low does not mean that inflation is not occurring. As of June, prices were still rising at an annual rate of 3.5%.
That’s massive inflation. Background: From January 2012 to January 2021, annual inflation never exceeded 2.9%.
But for most consumers, the annual inflation rate is only part of the story.
Since 2021, inflation has been rising more or less continuously. Over the past five years, prices have increased by more than 25%. In other words, an item that cost $100 five years ago may cost $125 today.
“Inflation rates alone don’t necessarily tell you how people are feeling,” said Ryan Sweet, chief global economist at Oxford Economics.
“The average consumer focuses on price levels,” he says. “Price levels are not going down.”
Economists say the difference between annual inflation and the cumulative effect of inflation over multiple years creates a disconnect that could underestimate the impact of inflation on consumers.
“After five years of high inflation in the 20s, consumers are generally dissatisfied with the high prices of the past few years,” said Bill Adams, chief U.S. economist at Fifth Third Commercial Bank. “However, inflation is typically reported as the change in prices from a year ago.”
What does a decline in inflation mean?
When the annual inflation rate decreases from month to month, it usually means that prices are falling or rising at a slower rate than before.
Prices do not rise or fall in unison. Gasoline prices fell by 9.7% in June, while food prices rose by 0.2%. Clothing prices rose 3.9% in the year to June, while used car prices fell 1.8% in the same year.
Can the inflation rate be negative?
If the economy goes into recession and consumers stop spending, the annual rate of inflation can become negative.
During the brief economic downturn caused by the coronavirus pandemic in 2020, the annual inflation rate fell to 0.1%. Inflation turned negative in 2009 due to the Great Recession.
In some cases, prices may fall across the board for an extended period of time. This phenomenon is called deflation, and it is bad because it indicates economic stagnation. The United States experienced deflation during the Great Depression.
Is there an ideal inflation rate?
If there is a sweet spot for inflation, it might be 2% per year. That is the Federal Reserve’s inflation target rate.
Economists say some inflation is a good thing. When inflation is too high, consumers feel pain. But deflation can cause economic disaster.
“People think all inflation is bad,” Sweet said. “We want a little bit of inflation because it puts oil on the wheels.”
Economists say the Fed’s 2% target is an arbitrary number that represents a level of inflation that supports economic growth and keeps consumers and businesses borrowing, investing and spending.
