Everyday prices
Why prices stay high when inflation falls
See why a slower inflation rate does not automatically reverse earlier price increases.
Slower growth still adds up
A falling positive inflation rate means prices are rising more slowly. It does not mean the price level has returned to where it started. The IMF’s inflation explainer defines inflation as a rate of price increase over time; the distinction between the rate and the level is essential here.
Watch a basket across three years
Start with a hypothetical $100 basket. After 8% inflation, it costs $108. After another year at 4%, it costs $112.32. After a third year at 2%, it costs about $114.57. The annual rate fell twice, yet the basket ended about 14.57% above its starting cost. Each year’s increase builds on the preceding price level.
Disinflation and deflation
Disinflation is a slowdown in the rate of inflation. Deflation is a decline in the general price level. In our example, 8% followed by 4% is disinflation. If the $108 basket instead fell to $105.84, that would be a 2% price decline for that basket. Neither word alone tells you how prices compare with a much earlier date.
Reversing a rise takes a different percentage
After a 25% rise, a $100 basket costs $125. Returning to $100 requires a 20% decline from $125. Applying a 25% decline instead would take it to $93.75. This is why subtracting inflation percentages can give misleading answers when the starting price changes.
Compare the dates that matter
When a headline says inflation is lower, look for its comparison period. To understand how costs changed since an earlier year, calculate the full cumulative change instead. Use the inflation calculator for a broad comparison and read the purchasing-power guide to translate that price change into what a fixed amount can buy.