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 reasons driving this move is that the year-on-year inflation rate in most countries has gradually declined from its post-pandemic peak to their targeted “2%” level.

In theory, moderating price growth should bolster consumer optimism, as it suggests that inflation’s erosion of wage gains is easing. Yet why do media reports still frequently highlight consumers struggling under the weight of high living costs?

The answer lies in the fact that the inflation rate measures year-over-year price changes. While current price growth may have slowed compared to the previous 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 CPI and core CPI year-on-year growth rates were 2.4% and 3.3%, respectively, marking their slowest pace in nearly three years. Meanwhile, the Federal Reserve’s preferred inflation gauge, core PCE, stood at 2.7%, down significantly from its peak of 5.6% in February 2022, reflecting a 2.9 percentage point decline.

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However, consumer perceptions often remain anchored to periods of lower prices, making it difficult to truly appreciate the recent moderation in price growth. From the perspective of consumers, prices for goods are still higher than they were a few years ago, even if the pace of increase has slowed.

According to average price data from the U.S. Bureau of Labor Statistics, most goods have seen price increases of around 20-40% over the past few years. Importantly, these elevated prices are unlikely to revert unless deflation occurs—something the Federal Reserve is unlikely to allow.

(Source: BLS)

Additionally, while wage growth has outpaced inflation since mid-2023, overall wage increases since the pandemic have remained below the cumulative rise in inflation. This has been a key factor in the decline in consumer confidence and the frustration with persistently high inflation in recent years.

(Source: BLS, Fred, TrendForce)