Low inflation doesn’t mean Americans are doing well – Center for Retirement Research

High prices continue – to make life less expensive – and more and more is somewhere

That year’s election confirmed that Holless argued that low inflation meant Americans were doing well. Consumers are concerned about price increases; They care about high prices, and they see high prices when they go to the grocery store, pay their rent, or look for a new car. Even if inflation goes to zero, high prices will continue, leaving people feeling that things are no longer affordable.

The fact is that prices will not fall to their pre-inflation levels. Such a decline would require a significant drop in wages, which would not be a good sign for the economy. In normal times, employers are very reluctant to cut wages; They believe that pay cuts can hurt morale and reduce output, realizing any money spent on money.

The only way households can recover from inflation is for their incomes to rise enough to cover the new higher costs of goods and services.

Let’s be clear about what inflation is. Inflation is a process that includes prices and income, and the rate of increase in the percentage change in goods and services over a period of time. According to the consumer price index for all Urban Consumers (CPI-U), inflation, after forty years of stable prices, took the middle of 20 percent in June, 2022 (see figure 1). Since then, however, the rate of inflation has declined significantly, and in the most recent report it stood at 3 percent.

But the decline in inflation has compensated for the fact that prices have ended up being much higher than before STURT inflation. Table 1 shows that the increase in monetary value between August 2020 and September 2025 was 25 percent. The fastest growing numbers for the average household are the costs of food, housing, and transportation (gasoline and cars), which add up to about 30 percent.

As noted, since prices are not regressive, the only way for things to become more expensive is for wages to rise. That is, if – over the period in August 2020-September 2025 – Prices have increased by 25 percent, wages need to increase by 25 percent for households to return to old spending patterns. Data from the Atlanta Fed suggests that wages across the board have increased 27 percent, with the biggest gains for the lowest pay (see table 2).

With wage gains roughly equal to inflation, people, on average, should be able to repeat their old spending patterns. But standing still is not enough, most would like to see their standard of living improve over the space of five years. Therefore, they feel like they are falling behind.

In addition, new developments are driving higher prices going forward, making life more affordable. An increase in tariffs from 2 percent to about 10 percent will raise the cost of imports, and the deportation of foreign-born people will increase the cost of fruits and vegetables will increase the cost of fruits and vegetables will increase the cost of fruits and vegetables, long-term care, and many other things. In addition, the demand for energy to power AI data centers has already caused electricity prices to spike.

So telling the American people that inflation – the rate of change in prices – is low and fair is not a winning strategy. They face the aftermath of high prices with the high prices they see every day and face high prices on the street.