During the latter part of 2023 the U.S. received some great inflation reports showing that the rate of inflation has slowed down to more moderate levels. This is good news. It gives the Federal Reserve the backing it needs to cut interest rates in 2024 and beyond. It means that prices will not continue to rise at astronomical levels. It means it will be cheaper for consumers to get mortgages and for businesses to get loans which is ultimately good for the economy. What it does not mean is that higher prices will go away.

We are in a period of disinflation which is when the rate of inflation is decreasing. In 2022, inflation was at a whopping 8% (as measured by CPI-U). In 2023, we saw this rate plummet to 3.5% with signs that this will continue to decrease. Historical inflation rate average is around 3%. It means that inflation is still occurring, but at a much more manageable rate.

It does not mean that we are in a period of deflation. Deflation is when the prices of goods actually goes down on a month by month or year by year basis. Deflation is not great. We want prices to go up in value at a moderate level. Deflation can lead consumers to spend less now, thinking that prices will fall. Businesses will lower wages or lay people off in an effort to remain profitable. There have been two major periods of deflation in the U.S., the Great Recession and the Great Depression.

High Prices are Probably Here to Stay

Prices of goods are still inflating (going up in value) just at a more moderate pace. They are not decreasing in value. That means high prices are most likely here to stay.

That doesn’t mean we could see the price of certain goods decrease in price. For instance, we saw the price of eggs shoot up due to supply issues only to come down to a somewhat more moderate level. We may continue to see prices of certain goods that spiked return to more moderate levels, but the overall cost of a basket of goods in the economy will probably continue to rise.

Many over the last couple of years have talked about the parallels between inflation we experienced in 2021 and 2022 and the 1970s. That high inflation period of time ended with disinflation, not deflation. Those price hikes we saw in the 1970s continued and never returned to levels seen before the period of high inflation.

I’m sure you’ve heard your relatives say “back in my day, we use to go to the movies for 10 cents and a gallon of gas was a nickel.” One day we’ll look back on the pre-Covid period and say I remember when a slice of pizza was $2. The prices we are all have been accustomed to are most likely gone and we have entered a period of a “new normal” when it comes to price expectations.