Remember, Disinflation Doesn’t Equal Falling Prices

While progress in the fight against inflation has been stalling in the past three months, the inflation rate has come down significantly since peaking in June 2022.

However, as Statista’s Felix Richter notes, looking at the steep decline of the inflation rate since then, some people are probably thinking: “Great, inflation is cooling. But then why is everything still so expensive?”

Whenever we’re discussing inflation coming down, it’s important to distinguish between disinflation and deflation.

What we’ve seen over the past year and hope to see more of is disinflation, i.e. a deceleration of price increases (yes, increases).

For the overall price level to actually come down, the inflation rate would have to drop below zero, which would signify deflation.

While the Fed desperately wants inflation to come back down, it is aiming for 2 percent inflation, not deflation, because the latter creates a whole set of problems on its own.

As the following chart shows, the rate of inflation (yellow line) has come down quite a bit from its June 2022 peak of 8.9 percent. Consumer prices (blue line) continue to climb, however, and are now 18.6 percent higher than they were in February 2020, just before the pandemic hit.

You will find more infographics at Statista

So while some prices will or have already come back down from their peaks as supply chain disruptions and global crises recede – see gas prices for example – prices will continue to rise at the aggregate level, albeit hopefully at a slower rate.