Inflation and The Cost of Living: One Of Those Has Fallen, The Other Never Will

The country’s top banker has acknowledged an economic reality that defines the financial lives of every household in the country: inflation may have slowed down from its peak in 2022, but the cost of living has only continued to rise.

Federal Reserve Chair Jerome Powell, the government official most responsible for controlling inflation, made that observation Wednesday at an event hosted by the New York Times. Powell was asked why the public is unhappy about the economy even though official statistics show it is doing quite well by historical standards.

Powell keyed in on the difference between inflation and the cost of living. Inflation is the rate at which prices for every day items change. Zero percent inflation would mean prices stayed exactly the same. (The Fed aims for inflation to run at a 2% annual rate.)

“People are unhappy because the price level is higher,” Powell said. “You can tell people that inflation has gone down, which is the change in prices. But that doesn’t matter to people who are paying 10%, 20% more for the important things in their lives.”

What Is the Difference?

Indeed, the inflation rate has stabilized from a four-decade high of 9.1% in 2022. But prices for most things have continued to rise, just at a slower pace than before. That makes central bankers happy, but everyday people, not so much.

The Consumer Price Index, which measures the prices of just about everything people buy to live their lives, is up 21.7% since the onset of the pandemic.

Individual items have risen even more. Eggs are 68% more expensive than in February 2020. Car Insurance is up 51% over the same period.

“The bottom line is that the Fed’s preferred measure of inflation, namely year-over-year inflation, may be back near 2%, but the living costs for households are still dramatically higher than four years ago,” Torsten Slok, chief economist at Apollo, wrote in a commentary.

Prices Won’t Go Back to What They Were

The post-pandemic burst of inflation continues to impact household budgets years after it’s faded away, and it has affected politics, too: voter anger over inflation helped sweep the Democrats out of power in the federal government in the November elections, according to at least one survey.

And those prices are likely to stay elevated, even as inflation fades. The Fed aims to keep prices rising slowly, not falling, because widespread and sustained price decreases typically only happen during times of extreme economic hardship, such as the Great Depression.