Why Haven’t Consumer Prices Dropped Despite Easing Inflation?

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As global economic growth slows, many central banks around the world have begun to cut interest rates in an effort to reignite economic expansion. One of the main drivers behind this move is that inflation rates in most countries have gradually fallen back to levels within their central banks’ target range.

In theory, a gradual moderation in price increases should boost consumer optimism, as it indicates that inflation’s erosion of wage gains is easing. However, why do media outlets continue to report on consumers being overwhelmed by high living costs?

The obvious reason is that annual inflation rates only consider changes in prices relative to the previous year. Although current price growth has moderated compared to last year, it does not change the fact that prices have significantly risen from the pre-pandemic levels.

(Source: BLS, EuroStat, Statistic Bureau of Japan, TrendForce)

Take the United States as an example. The latest US – CPI and US – core CPI year-on-year growth rates were 2.6% and 3.3%, respectively, marking their slowest pace in nearly three years. Meanwhile, the Fed most preferred inflation gauge, US – core PCE, stood at 2.7%, down significantly from its peak of 5.6% in February 2022, reflecting a 2.9 percentage point decline.

However, consumer perceptions often remain anchored to periods of lower prices, making it difficult to recognize the recent moderation in price growth. For consumers, goods prices are significantly higher than pre-pandemic levels, even if the pace of increase has slowed.

According to data from the U.S. Bureau of Labor Statistics, the average prices of most goods have risen by approximately 20-40% over the past few years. The key point is that these prices are unlikely to return to previous levels unless deflation occurs—a scenario that the Federal Reserve is determined to prevent.

(Source: BLS)

Moreover, while consumer wage growth has surpassed the inflation rate since mid-2023, the overall increase in wage levels since the pandemic has still lagged behind inflation. This persistent gap has been a significant factor in eroding consumer confidence and fueling anger over high prices in recent years.