Are We Getting Used to High Prices?

Something interesting is starting to emerge when it comes to this chapter of the inflation story. For context, in the decade before COVID, the annual inflation rate (as measured by the Consumer Price Index (CPI)) ran at about 2 percent. When the global economy shut down and commerce essentially halted due to the pandemic, the annual inflation rate bottomed at 0.1 percent (May 2020).

As the economy opened up in fits and starts, and the global supply chain was gnarled up, inflation accelerated in a big way. It took 15 months for the rate to peak at 9.1 percent in June 2022, before retreating to 3 percent. But progress on bringing down the inflation rate has slowed down to a crawl over the past 18 months. From June 2023-June 2024, the annual rate bounced around between 3-3.5 percent and over the past six months, we have seen the rate fluctuate between 2.4 – 3 percent.

With that backdrop, it was hard to get fired up about the November CPI, which showed an acceleration in prices during the month, pushing the annual rate up by a tenth of percent to 2.7 from 2.6 percent in October. Cue the sad trombone. But the news wasn’t all bad.  For most of the year, the biggest contributor to the inflation rate remaining elevated has been shelter. According to the government, the cost of housing increased by 4.7 percent from a year ago, accounting for nearly 40 percent of the increase in overall prices last month. Although housing inflation remains above the average 3.3 percent annual increase in the five years before the pandemic, it continues to decelerate from a four-decade peak of 8.2 percent in 2022.

What seems different now is that while we all whine about prices, there has been a shift from the general negativity that infused the election polling about the economy overall and inflation in particular. A new survey from the Federal Reserve Bank of New York showed that consumers believe that the inflation rate will remain at about these levels in the coming years. However, they also expressed optimism about their personal financial situations. Notably, the share of those who expect to be worse-off dropped and households put lower prospects on missing debt payments.

There are a few potential explanations for the shift. Perhaps workers are feeling a little less stretched because average annual wages have been rising faster than inflation for most of this year. Or maybe the 58 percent of Americans who own stocks are feeling a boost from another double-digit performance year. Or maybe, we are just getting used to prices being higher overall. Let’s consider this last possibility as “price acclimatization”.

I am not a rock climber, nor have I ventured into high altitudes for long, but I did read “Into Thin Air” by Jon Kraukauer, which introduced me to the concept of acclimatization, the methodical process of allowing your body to adapt to less oxygen at higher altitudes. What if part of our ability to better absorb higher prices is due to the fact that we have essentially acclimatized to them?

Hey, if you aren’t feeling it, that’s ok too. After all, prices are up by 22.7 percent from 5 years ago, compared to an 8.9 percent increase in the five-year period from 2014-2019. And yes, feel free to whine about egg prices, which are up a whopping 37.5 percent over the past year (hint: skip the eggs and go back to cereal, which is down 0.5 percent from last year!)

The next chapter in the inflation story will continue when the Federal Reserve convenes its two-day policy meeting next week. Central bankers are on track to cut rates by 0.25 percent, which would put the fed funds rate at 4.25 to 4.50 percent. All eyes will be on economic projections, which are likely to show stronger growth from the September estimates, and also the press conference, where Chair Powell will deftly avoid telling us what the January meeting holds.