There was positive inflation news last week, and the Federal Reserve took a dovish turn projecting possible rate cuts next year. So why are people still troubled when they go to the grocery store and see how much they are spending? Shouldn’t we feel better about the economy when inflation drops to one-third of its peak levels during the pandemic? Let’s break it down a bit.

Disinflation versus Deflation

What we are experiencing now is known as disinflation—when prices are rising but at a slower pace.  When will prices return to “normal?” Well, for most things, never.  We have experienced the prices of some things drop, like eggs, gasoline, electronics, and air travel.  But in general, prices won’t return to pre-pandemic levels.  And we don’t really want that to happen. When all prices drop--known as deflation—it is not a good thing.

You might remember at the beginning of the pandemic, when everything shut down, many prices dropped because demand had fallen off a cliff! That was not a healthy economy. Generally speaking, if prices are falling regularly, you may postpone buying things one more day or one more week anticipating the price of whatever you need to be even lower than it is today.  (Japan battled this phenomenon for a long time.) This downward spiral can be disastrous for an economy. Think about how difficult it would be for manufacturers to figure out how much they should be producing, and when. This is why the Federal Reserve sets a low but positive inflation target.

Median Wages

However, an analysis of the purchasing power of median wages concluded that it buys the same bundle of goods today as it did before the pandemic, with a bit leftover. Of course, every individual experiences inflation differently. The good news is that even though prices may not be falling overall, waging won’t be dropping either.

Lesson Idea

Scott Horsley of NPR explains this very clearly in a 4+ minute clip from Scott Simon’s show Saturday. Students can listen to this clip and then answer a few questions. This should prepare them for any dinner time conversation with family or friends when someone complains about prices!

• What is inflation?
• What is disinflation?
• What is deflation? Why is this not desirable?
• If wages keep pace with inflation, should we care about inflation? Why or why not?
• Why do you think people are still feeling hurt by inflation?

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.