Low inflation doesn’t mean Americans are doing well – Center for Retirement Research

High prices persist – making life more unaffordable – and further increases are coming

This year's election has proven hollow that low inflation means Americans are doing well. Consumers don’t care about inflation; they care about inflation. They care about high prices, and they see high prices when they go to the grocery store, pay rent, or look for a new car. Even if inflation is zero, high prices will persist, making things feel unaffordable.

In fact, prices will not fall to pre-inflation levels. Such a decline would require a significant drop in wages, which is not a good sign for the economy. Under normal circumstances, employers are very reluctant to cut wages; they believe that cutting wages will damage morale and reduce output, thereby eroding any savings in wage expenditures.

The only way for households to recover from a bout of inflation is for wages to rise enough to cover the new, higher costs of goods and services.

Let’s first clarify what inflation is. Inflation is a process involving increases in prices and wages, and the inflation rate is the percentage change in goods and services over a period of time. After four decades of relatively stable prices, inflation began to rise in mid-2021 and peaked at 9% in June 2022, according to the Consumer Price Index for All Urban Consumers (CPI-U) (see Figure 1). However, inflation has fallen sharply since then, standing at 3% in the most recent report.

But the fall in inflation does not make up for the fact that prices end up much higher than they were before inflation broke out. Table 1 shows that expenditure-weighted prices increased by 25% between August 2020 and September 2025. The most immediate figures for the average household are the prices of food, housing and transportation (gasoline and cars), which together have increased by nearly 30%.

As mentioned before, since prices are not coming back down, the only way to become affordable again is to raise wages. That is, if prices rise by 25% between August 2020 and September 2025, wages would need to increase by 25% for households to replicate their old spending patterns. Data from the Atlanta Fed show wages rose 27% across the board, with the lowest income earners seeing the largest increases (see Table 2).

Since wages rise roughly equal to price rises, people on average should be able to replicate their original consumption patterns. But stagnation is not enough, most people want to see their living standards improve within five years. As a result, they feel they are falling behind.

Additionally, new developments indicate that prices will be higher in the future, making life even less affordable. Raising tariffs from an average of about 2% to about 10% will raise the cost of imports, while mass deportations of undocumented foreign-born workers will raise the cost of fruits and vegetables, long-term care, new construction and many other aspects. Additionally, the energy demands of AI data centers have caused electricity prices to skyrocket.

So telling Americans that inflation—the rate of change in prices—has fallen and that they are fine is not a winning strategy. They face the consequences of high inflation in high prices they see every day and face further price increases in the future.