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Will Inflated Prices Ever Go Back Down? Probably Not!

Why Prices Are Probably Never Going Back Down

While inflation might be gradually going down, we probably won’t ever see those pre-pandemic prices at grocery stores and department stores. 

That’s because prices on average generally rise up over time and only fall when something is wrong with the economy. Officials at the Federal Reserve who are responsible for setting the nation’s monetary policy are determined to keep it that way. 

According to the Consumer Price Index(CPI), one of the government’s official inflation measures, the inflation rate has fallen to 3.1% annually from its peak of 9.1% in June 2022. But how much damage has rising prices already done? The CPI states that prices rose approximately 19% between February 2020 and November 2023. 

Source: U.S. Bureau of Labour Statistics

If you are familiar with financial news, you would think that inflation price is not usually depicted like this. Inflation is most commonly shown on graphs like this- 

Source: U.S. Bureau of Labour Statistics

In financial jargon, a drop in the inflation rate is called disinflation and the sustained drop in average prices is called deflation. The target of the Federal Reserve is to keep inflation at 2% and to avoid deflation. 

Lisa Cook, Federal Reserve Governor, said in a speech last month, “The lack of deflation may help explain why many Americans feel pessimistic about their finances and the economy even though by many measures, the broader economy and household budgets are doing better than ever thanks to rapid wage increases.”

She added, “If the economy is doing better, if this disinflationary process that we keep talking about is actually in process, then why are people so upset?”

The Fed has efficient tools at its disposal to prevent deflation from ever happening and is willing to use those tools. The Federal Reserve influences the inflation rate by putting its thumb on the scales of financial markets with its benchmark funds rate, and by buying trillions of dollars worth of securities, both of which influence what interest rates you pay when you borrow money. 

In the past, the Fed has influenced policies at times when it looked like deflation might set in. In the late 2000s, the central bank used trillions of dollars to eliminate any possibility of deflation and prevent the Great Recession from totally collapsing the economy. The only prolonged deflation in U.S. history was the Great Depression. 

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Key Takeaways

  • The inflation rate has fallen to 3.1% from its current peak of 9.1% in June 2022, however, that just means price increases are just slowing down. We probably won’t get to see pre-pandemic prices ever again. 
  • The policy of the Federal Reserve is to keep inflation below 2%, not to let average prices fall. 
  • Although average prices have risen 19% since February 2020, some items have risen much faster, while others have come down. 

Read Also:- When is the Next Fed Meeting? What Can You Expect?