Economist Writing Every Day

The latest CPI-U price data shows that the rate of inflation in the US has slowed significantly to just 3% in the past 12 months. That’s a huge improvement from the peak last June, when the annual rate of inflation was over 9%. Still, prices as a whole aren’t falling, and they clearly aren’t anywhere near where they were before the pandemic: using the CPI-U, prices are up over 17% since January 2020.

Lately I’ve heard many people asking a good question: will prices ever get back down to where they were? Usually they mean pre-pandemic prices, though sometimes they refer to a particular point-in-time (such as the start of Biden’s presidency). The only correct answer is “we don’t know,” but I think a likely answer for many goods and services is “no.” For many reasons, the nominal prices of most goods and services rise over time. Though this is not true for everything, of course (newer technologies are one example we often see).

But what about specific goods that we buy frequently? Will we ever see gasoline consistently below $3 per gallon again? Will we ever see milk consistently below $4 per gallon again? What about eggs and bread? And indeed, these prices are well above January 2020 levels: 23% higher for milk, 43% for bread, 45% for gasoline, and a whopping 52% for eggs. For the price data, I am using this convenient data on common food and energy goods from BLS.

For some of these items, I do think you might someday see prices fall back to levels consumers were used to from the recent past, since food and energy prices tend to be volatile. For others, though maybe not. But I think we as consumers can become overly focused on staples that we buy frequently and can easily recall the price in our heads. For example, while eggs, bread, and milk are items that we buy frequently (including being the staples of stocking up before a storm), in total these constitute just 0.6% of average consumer spending.

If instead of those 3 staples, your mind naturally anchors on produce prices, the trends look different: oranges are up 23%, but bananas are only up 10%, and tomatoes are, in fact, down 14% since January 2020. But again, these items are less than 0.5% of total consumer spending. Ideally, we shouldn’t anchor on any one subset of goods when doing a good analysis, even if it is natural for us to do so in our lives as consumers.

This is where the benefit of a price index, like the CPI-U, comes in.

A price index allows us to look at the broader picture. Not just eggs and milk, or bananas and tomatoes, or gasoline and electricity, but all goods and services that we consume. And importantly, the items are weighted according to how much consumers spending on each item. Price indexes also include quality adjustments, but these aren’t very important in the short run.

What does the big picture look like when considering all goods and services? As stated at the beginning of this post, the CPI-U shows that all goods and services are up about 17% since January 2020. A slightly different price index, the Personal Consumption Expenditures price index, shows an increase of just under 15%. Slightly less, but in the ballpark.

One reason that prices may not fall back anywhere near their January 2020 level is that wages have also risen significantly since then. Consumers have more income, which means more nominal demand for goods and services. And wage deflation is highly unlikely. How much higher are wages? It depends on which measure we use, but a common measure is the average private-sector wages of non-supervisory workers, which is up 20.6% since January 2020. That’s more than both measures of inflation. Another common measure is median weekly earnings of full-time workers, which is up 16.4%. That’s right at the rate of inflation (and it’s measured on a quarterly basis, rather than monthly).

So we can see that depending on which measure of wages and inflation we use, consumers are a little better off or no worse off than before the pandemic. This is not exactly the kind of data that should make us scream with excitement, but it is very different from the impression you would get by just focusing on eggs, bread, and milk: consumers are clearly worse off for these goods. The past 3 years have clearly not been the best economic times! But we also shouldn’t overstate how bad they have been.

And if the recent CPI inflation data is an indication, things will continue to improve in the near future.