Inflation is low. Prices are still high. What's going on?

The falling inflation rate should be a good feeling. But every supermarket department presents us with a new math problem.

Is that bag of chips worth $5? Are we really paying $6 for a pack of bacon now? And since when does frozen orange juice cost almost $4 a can?

“We hear on the news that inflation is stabilizing, but in reality for the consumer, that's not the case,” said Keith Albright, marketing insights and analytics manager at Cargill. “When they walk down the aisle, they're still burdened with that value equation.”

Inflation may be falling from generational highs, but that doesn't mean life is getting cheaper. Higher prices continue to fuel our economic fears.

“It's about making trade-offs. As the customer walks down the aisle, they're constantly having this self-debate: If I can save money here, I can get the Starbucks coffee I want,” Albright said. “It's not a new behavior, but it's more important now.”

The Consumer Price Index (CPI) measures the average change in prices paid by urban consumers over time for a “basket” of goods and services, from milk and shoes to haircuts and child care. The CPI has cooled from a peak of 9.1% in June 2022 to 2.9% in July, meaning prices are still rising, albeit at a slower pace.

It is helpful to look at prices in the context of wages and other factors, says Louis Johnston, an economics professor at the College of St. Benedict and St. John's University in Minnesota.

“People say, 'Well, I paid a nickel for this when I was a kid.' What is that nickel relative to? Was it relative to a dollar a week? Was it relative to making $1,000 a week?” he said. “Prices expressed only in dollars or cents are almost meaningless.”

At the very least, food prices are expected to remain relatively stable next year. The U.S. Department of Agriculture forecasts that food prices will rise 1% overall this year and less than 1% in 2025.

But this is all cumulative. From 2020 onwards, it only took a few years for food prices to rise as much as they had in the previous 16 years.

General Mills CEO Jeff Harmening said of prices late last year: “Whether it's groceries, gas, rent or any other thing… it's going to take a while for consumers to get used to the new price points.”

Food prices

When Vice President Kamala Harris, the Democratic presidential candidate, talks about putting a stop to “price gouging” in supermarkets, she is referring to the 25% rise in domestic food prices since 2020. The lower inflation of recent months has not stopped the overall rise in prices.

Food companies say they have raised prices to keep up with rapidly rising costs of producing, shipping and marketing their products while maintaining their profit margins. Permanently higher wages could mean permanently higher food prices.

A Federal Trade Commission report found that major grocery chains “took advantage of this moment [of the pandemic] to stay ahead at the expense of their competitors and the communities they serve.” But many smaller grocers have thin profit margins and are suffering from higher prices that they pass on as consumers spend less or shop elsewhere. Parent company UNFI's retail revenue has fallen 94% this year.

Restaurant prices

The share of Americans' disposable income spent on food has hit a 30-year high of 11%, but much of that is due to restaurant spending, according to USDA data. While food spending as a share of disposable income has been declining overall for decades, restaurant-goers are paying more each year for a drive-thru burger or a sit-down meal with family. Restaurant prices have risen 28% since 2020, driven by higher wages and other overhead costs.

Ham, rice and orange juice

The latest inflation report alone shows that there are bargains to be had on ham and rice. In July, the price of ham fell by 2% compared to a year ago and the price of rice by almost 4%. Nevertheless, both prices are close to record highs. Frozen orange juice, the price of which has risen sharply in part due to diseased orange trees, is expected to fall significantly in price next year as a better harvest is expected in 2024.

Shelter

Home prices are supporting the consumer price index, in part because high interest rates – which are supposed to curb consumer spending and lower inflation – are discouraging buyers and stalling new construction. The Federal Reserve is expected to cut interest rates in September, a move that is likely justified by the weakening labor market, according to Neel Kashkari, president of the Federal Reserve in Minneapolis.

Tools

Natural gas prices have fallen after a warm winter left large quantities unused. Electricity, on the other hand, is becoming more expensive, mainly due to massive investments in aging infrastructure and renewable energy.

petrol

Gasoline prices are volatile, fluctuating depending on the time of year and geopolitical tensions. Although the price per gallon of regular unleaded gasoline jumped as a result of the COVID-19 pandemic and is still higher than it was in 2019, prices this summer have landed at roughly the same levels as a decade ago.

Car insurance

After a drastic drop in 2020, the cost of car insurance has skyrocketed due to rising repair costs, more frequent and serious accidents, severe weather and an increase in consumer lawsuits. According to insurance comparison website Insurify, storm damage in Minnesota could cause premiums to rise by more than 50% this year.

health insurance

Health insurance inflation has fallen year-over-year, although the Consumer Price Index (CPI) measures profits retained by health insurers and therefore cannot be directly compared to consumer prices such as health insurance premiums. Survey data suggest that premiums have risen in part because of higher health care costs, such as a rise in the use of weight-loss drugs. There is also a lag between when health care providers pass inflation on to consumers through premium increases.