Why Are Prices Still High When Inflation Is Falling?

01 · Inflation and prices

Inflation is cooling. Why does breakfast still cost more?

When headlines say inflation has fallen from its peak, it is easy to expect menus and everyday goods to return to their old prices. But prices rising more slowly and prices actually falling are different questions. One concerns the pace of change; the other concerns the price level.

Start a hypothetical basket at 100 currency units. A 5% rise followed by another 2% rise gives 105 × 1.02 = 107.10. A lower inflation rate in the second year does not return the basket to 100. Change the assumptions below to see the distinction.

02 · Historical data

The same history, viewed through two different lenses

Year-over-year inflation compares this month with the same month a year earlier, so the comparison base matters. Rebasing an index to a common starting value of 100 instead shows the relative change accumulated since that starting month. Both views are valid, but they answer different questions.

This fixed historical window runs from January 2020 through December 2024. Move the observation month and look for a period when annual inflation had fallen but the rebased index remained above its starting point. U.S. CPI, PCE and Taiwan CPI have different scopes; a common scale does not make their definitions identical.

03 · Disinflation and deflation

Cooling does not undo earlier price increases

If an index rises from 100 to 110 and then from 110 to 112, the second increase is smaller while the level is higher. A slowing inflation rate is usually called disinflation. A decline in an aggregate price index over the relevant comparison period, with negative inflation, is a different idea: deflation.

Individual prices need not move together. Some products may become cheaper while some services become more expensive. CPI summarizes a particular weighted consumption basket; it is not an exact copy of every household’s shopping bill. A one-month decline alone also does not establish a sustained, broad decline in prices.

04 · Real purchasing power

A bigger paycheck does not always buy more

A 3% pay increase sounds better than no increase. Yet if prices rose cumulatively by 20% over the same period, that nominal gain may still lag living costs. Real purchasing power compares the pay change with the price change, rather than asking only whether the paycheck increased.

The next exercise is a separate teaching simulation. Set pay growth and price growth over the same comparison period and use one currency throughout. These are not official wage observations, and no U.S. and Taiwan currency amounts are mixed.

05 · Comparing indicators

Why CPI and PCE do not tell exactly the same story

U.S. CPI-U tracks prices for a basket faced by urban consumers. The PCE price index covers consumption by U.S. residents and purchases made on their behalf, including some healthcare paid by employers or government. Scope, weights and index construction differ, so two inflation measures are not interchangeable.

Taiwan CPI reflects local household consumption patterns and DGBAS methods. Here, U.S. PCE is seasonally adjusted and both CPI series are not; annual rates always use observations from the same underlying series. Rebasing to 100 compares relative cumulative changes, not absolute living costs across countries.

06 · Key points

Key points

First ask whether the chart shows a rate or a level. Falling inflation and a rising price index can occur together, while an individual product may move differently from the aggregate.

To understand pressure on a household budget, consider accumulated price increases, the household’s own spending and nominal income over the same period—not just the latest annual inflation rate. The data and everyday experience may simply be answering different questions.

Frequently asked questions