Many people I talk to are eager for "prices to get back to normal", but that's not how inflation works. Medora Lee does a good job reminding us of that.
When talking about inflation, it's important to remember that inflation is a rate that measures how fast prices are rising. If the consumer inflation rate drops from its 40-year high of 8.6% in May, prices are still rising - just not as fast.Consumers won't feel immediate relief even as the inflation rate slows because many of those elevated prices are likely here to stay, said Michael Ashton, managing principal at Enduring Investments in Morristown, NJ.
"The price level has permanently changed," said Ashton. "Until your wages catch up (to inflation), it will continue to hurt."
Even when inflation returns to target 2% levels, prices won't return to "normal" 2019 levels. Prices will continue to grow, but at a slower and more predictable rate.
"Once core prices go up, generally they don't come down," Roussanov said. "In the last 40 to 50 years, we've never seen deflation in core goods. Most durable goods and services don't really come down in price."
And deflation is more dangerous than inflation because it can lead to a total economic collapse. When people believe that their money will buy more in a year than it will now, they stop consuming and just wait.
Additionally, modest, predictable inflation is seen as a sign of a growing economy. It incentivizes people to spend money now rather than waiting, allows wages to increase either in line or above inflation to boost the standard of living and makes it easier for businesses to plan, according to the Federal Reserve and IMF.
