Why does everything still feel expensive even if inflation is down?

The main reason everything still feels expensive is the difference between inflation slowing down (disinflation) and prices actually falling (deflation).

When you hear that inflation has dropped (for example, from a peak of 9% down to 3%), it does not mean goods and services are getting cheaper. It simply means they are rising in price at a slower rate.

Here is why your wallet is still feeling the squeeze:

1. Cumulative Inflation is "Baked In"

The high inflation of recent years permanently raised the price baseline. If a basket of groceries cost $100 in 2021, and cumulative inflation pushed it to $120 by 2024, a new, lower inflation rate of 3% means that same basket now costs $123.60. The price did not drop back to $100; the elevated price is the new normal.

2. Wages Often Lag Behind Prices

Although average wages have risen, they historically lag behind rapid spikes in the cost of living. It takes time for wage growth to catch up to and exceed the cumulative price increases of the past few years. Until wages outpace that cumulative gap, purchasing power feels restricted.

3. Highly Visible Essentials Remain Stubbornly High

Headline inflation rates are an average of many categories. While some volatile items (like gasoline or electronics) may drop in price, everyday essentials like groceries, rent, home insurance, and utilities often remain high or continue to climb, keeping the daily perception of expensiveness top-of-mind.

4. Psychological Anchoring

We naturally anchor our expectations to past prices. Because the price increases between 2021 and 2024 happened so rapidly, our brains still compare today's costs to what we paid just a few years ago, making current prices feel jarring.